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Fed Flip-Flops on House Flips

Finally, some good news from the FHA. Effective February 1st, the FHA is waiving their requirement of the “90 day holding period” before home sellers (predominantly real estate investors and speculators) can resell a piece of real estate to a buyer who uses FHA Insured financing.  Given the recent increase of the UFMIP, coming reduction of seller’s concessions, and lower credit scores requiring larger down payments, it is refreshing to see the FHA enacting something that will actually help move inventory and improve neighborhoods.

There are multiple reasons why this is a good idea:

  1. This will facilitate the return of repaired and rehabilitated properties to the market in a more timely fashion.
  2. Properties need not lie vacant for up to 90 days.  Vacant homes are both a target of vandalism and a de-stabilizer of real estate values.
  3. The holding costs of the seller (mortgage interest, real estate taxes, insurance and property maintenance) are typically passed on to the purchaser in the form of higher sales prices.  This is unnecessary and counterproductive.
  4. In order to firm up a bottom to the real estate market, inventory has to get pushed through the system.  Waiving the 90 day rule will facilitate the expeditious transfer of distressed inventory.

There are some issues that you need to be aware of:

  1. Not all lenders have adopted this change into their product offerings, as of yet.
  2. All transactions must be “arms-length”, with no identity of interest between the buyer, the seller, or any interested party.
  3. The property cannot have a pattern of previous flipping.  Typically, there can be only one flip in the past 12 month period.
  4. The property must have been marketed fairly (like through the MLS, an auction, etc.), so there can be no suspicion of “insider deals”.
  5. If the sale is 20% higher than the seller’s cost to obtain, lenders will want to see evidence of how that can be justified (repairs made and circumstances surrounding the initial sale, for example).
  6. Don’t be surprised when the lender asks for a second, independent appraisal for additional comfort of true property value or an Engineer’s Report to attest to the property’s condition.
  7. This is a one-year moratorium of the prior rule that can actually be ended without notice earlier if the Commissioner of HUD believes that there is an abuse of the relaxation of the rule.

Overall, this is a welcome step to help get homes (whether they’re Foreclosures/REOs or investor/speculator sales) back into the hands of people who will occupy them, and help bring some stability back to our communities.

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