Why The FHA is Waiving the 90 Day Flip Rule
The government announcement states: "To help facilitate the return of repaired and habitable properties to the market in a timely fashion, additional exemptions to the 90-day resale restriction period must be granted for the purchase of properties by investors. This policy change will help to sell properties that may otherwise remain vacant for up to 90 days, while offering affordable housing options to buyers wishing to use FHA-insured financing."
To support this decision, the government issued these findings:
- Since the restriction has been in place, foreclosures have increased rapidly, and inventories are rising.
- FHA now owns a great many homes, and waiving this restriction will help to move them in the market.
- Many buyers aren't able to get financing today unless they can go FHA, so this will allow more buyers to get financing.
- Most foreclosed properties are sold "as-is." This gives investors the incentive to do rehab work, as they can sell the property sooner, cutting holding costs & risk of vandalism.
- The fact that purchase, rehab and resale can be accomplished in less than 90 days makes this decision one of responding to market needs.
The Basic Criteria To Qualify
The waiver is set to expire one year after its effective date of February 1, 2010. FHA plans careful monitoring of defaults, checking to see if there are more than desired among properties taking advantage of this waiver. If so, the program can be canceled at any time. All transactions must be arms-length. The seller must hold title to the property, meaning the one delay will be the wait for proper recording and deed. LLCs and other corporations will be scrutinized by lenders for legality and arms-length status. There can be no flipping activity for the same home during the preceding 12 months. And finally, the property must have been marketed openly, via an MLS listing, auction, For Sale By Owner offering or developer marketing. Special scrutiny for irregularities will be done on any deal with an "assignment of contract of sale."
20% or Higher Sale Than Acquisition Cost Brings More Rules
In cases where the sales price of the property is 20% or more than the acquisition cost, a new set of rules kick in. The first important thing for the investor to do is to document every dollar of acquisition and rehabilitation cost. Once the 20% threshold is reached, the waiver will only apply if the lender:
- justifies the increase in value by retaining in the loan file supporting documentation and/or a second appraisal which verifies the rehab and subsequent increase in value.
- if no work is performed, gets an appraisal providing adequate explanation of the increase in property value since the prior transaction.
- provides a property inspection report to the buyer, and it can be charged to the buyer. The inspector cannot get paid by any entity other than the lender, can't take or give referral fees for the inspection, and can't recommend repair companies or be involved in repairs.
- make sure this inspection is thorough, covering structural, roof, plumbing, electrical, heating, air conditioning, fireplaces, balconies, walkways, decks, driveways, and solid fuel burning appliances.
This waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for Purchase program. For those real estate investors who have avoided deals because of the 90 day flip rule, go out now and take advantage of the huge inventory of foreclosure bargains.
