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Re-Habber's REJOICE: FHA Extends "Anti-Flipping" Waiver

by: Michael Wasserman

Good news for anyone interested in buying & flipping single family homes. The FHA has extended it's "90 day anti-flipping" waiver for another two years. The extension leaves open some great money-making opportunities for individuals and enterprises interested in real estate transaction. It should also be a benefit to communities burdened by vacant/run down/abandoned housing stock. (Not bad for those of us who facilitate home purchases and sales either).  In this context, "flips"  are two-step real estate deals where a distressed home is purchased cheap, fixed-up quickly and then resold at a profit. The art of the deal involves finding the right homes at the right price, making the right repairs, and then reselling as quickly as possibly to minimize the "carrying costs" associated with owning the property. 


Historically, flipping can be a very profitable enterprise. Unfortunately, many such profiteers made their money by committing mortgage fraud. Unscrupulous sellers could (and did) inflate prices on homes by single or multiple sales & resales, typically having done little or no rehab work at all. Unsuspecting buyers paid higher prices and mortgage lenders made loans for amounts far in excess of actual (fair) property values. 

As Ken Harvey from Inman News summed up:
Those flips frequently involved collusion and fraud by teams of mortgage loan officers, realty agents and appraisers -- even straw buyers who defaulted and disappeared without making a single payment -- and racked up significant losses to FHA's insurance fund. Neighborhoods suffered because the properties remained empty and in bad physical condition, depressing values of houses in the immediate vicinity. 


In 2003, the FHA sought to mitigate fraud and restrict price inflation by imposing limitations, including a 90 day rule. FHA only insures mortgage loans on homes that have been owned by sellers for at least three months. (The typical flip investor really wants to recycle these properties much much quicker.) 


That changed in 2010 when a more over-riding consideration became the problem of neighborhood blight caused by declining real estate valuations. FHA issued it's first one-year waiver of the 90 day rule, then extended it annually for 2011 and most recently 2012. The latest pronouncement extends the waiver thru 2014.


FHA will insure mortgage loans for buyers if two general conditions are met (and are well documented)

First, all transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction. This means that 

  • The seller must actually own the property
  • The buyer must intend to buy for him/herself (i.e. not assign the contract to a third party)
  • The property must be fairly marketed (i.e. on the MLS or otherwise offered for public sale)
  • There must be no  pattern of previous flipping over the previous 12 months. 
Second, IF the difference between the seller's original cost of acquisition and the sales price is greater than 20%:

  • A second appraisal verifies that the seller made sufficient legitimate renovations or repairs  to substantiate the increased value (or other some other documented explanation for the increased value. The lender cannot charge the buyer for this second appraisal.
  • The lender must obtain a property inspection and share it with the Buyer. The inspection must cover the property foundation, floor, ceiling, walls & roof; the exterior siding, doors, windows, decks, balconies, walkways &  driveways; the plumbing, electrical, ventilating, &; heating and air conditioning systems; interiors; and all insulation, fireplaces &; solid fuel-burning appliances.
  • If the inspection report notes that repairs are required because of structural or “health and safety” issues, those repairs must be completed prior to closing.
The FHA rules create a clean & reasonable way to allow developers to turn over their rehab projects quickly, from purchase to fix-up to sale against our concern that scammers may try to defraud lenders and the FHA by making selling homes at inflated prices or that are shoddily renovated. 

The real key to this announcement however is the two year time frame. FHA is sending a strong signal to flippers and would-be flippers that they can pursue these ventures across a much longer time frame. I expect to see more FHA financed deals in the coming months, involving sellers with "HGTV" dreams and buyers looking for affordable, rehabbed homes.

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