In case you have not heard there has been some excited news from FHA recently. They are again waiving their anti-flipping rule for another year. This was signed on January 15, 2011 and went into effect this morning. There seems to be some confusion so here is the low down.
The term real estate flip has a bad name in our industry. It is generally thought of as an illegal scheme where a real estate investor (REI) buys a property and does very little to no improvements and then sells for a handsome profit. It is also believed that these schemes use illegal and inflated appraisals when the REI sells the home to the end user.
For these reason HUD had decided to require 90 day title seasoning on all loans it insures. This made it necessary for the REI to hold the property for at least 90 day before they could contract with their buyer.
The reality is REIs are a very important piece to our housing recovery and anything that will prevent them from doing business is bad for our economy. HUD notices this and is acting by waiving the 90 day title seasoning requirement under these conditions:
- Transaction must be arms length
- The seller must hold title (no double closings)
- The property has no flipping history (they look at a 12 month chain of title)
- The property was marketed openly
If the REI is selling the property for more than 20% of what they paid for it, exclusive of any repairs, there are some additional requirements:
- Seller must prove substantial improvements or the value can be justified by a second appraisal. (I strongly recommend you keep good records of all improvements)
- A separate FHA inspection will be required
Just because FHA will insure the loan does not mean that all FHA lenders will do the loan. If you hear that your buyer is getting an FHA loan and they were denied because of the anti-flipping rule you will need to refer them to another lender. Feel free to click on our “need a referral” link above for a list of investor friendly lenders.
This is only for FHA loans. Mortgage Insurance companies still have a 90 day title seasoning requirement meaning that if your buyer gets a conventional loan they will need to wait 90 days or put 20% down to avoid the mortgage insurance requirement.