FHA Flip Rule Seasoning Waiver

FHA Flip Rule Seasoning Waiver
On Friday January 15, 2010 the FHA announced it was suspending their now infamous 90-day anti-flipping rule for 1 year, effective February 1, 2010.

Although this is great news for investors trying to flip properties to FHA Buyers, there are also some do’s and don’ts you need be aware of.

IMPORTANT DISCLAIMER: But please be advised that we are not attornies nor are we rendering any legal advice. These are our opinions after having reviewed HUD’s actual 3 page flipping waiver, which we advise you and any savvy investor to do for yourself as well. You can find a link to it on HUD’s website, and I’ve also linked to it from the blog post on 3bbinvestments.com


What’s the advantage to the Investor?
Because for years investors’ endeavors to earn an honest profit flipping great houses to qualified FHA buyers have been stymied by the FHA’s "No Flip 90-Day Seasoning Rule". This meant, as an investor you couldn’t resell to a buyer using an FHA loan until after you’ve been "seasoned" on title for at least 90 days. In fact you can’t even go to contract until day 91 – which put your closing typically another 30-45 days beyond that at minimum. This added time, in most cases, dilutes the potential profit so much that deals become unprofitable to conclude.

So this waiver essentially pushes the pause button on this rule. For at least the next year, starting Feb 1, 2010, investors won’t have to sit on your laurels waiting for 90 days on title before you can sign a contract to sell that beautifully rehabbed house to an FHA buyer.

In an attempt to stimulate sales, the FHA has recognized that people can buy properties, substantially rehab them and improve the value of them in less than 90 days. And also that, "…the 90-day resale restriction often hinders community stabilization and revitalization." But only time will tell if they elect to extend this waiver, repeal the rule entirely, or simply go back to the way things were after February 2011.

FOUR KEY POINTS

1st: Seller Must Hold Title
Upon reading the waiver you’ll notice that the "seller" must hold title to the property. In other words, they may very well expect to see you (the investor/seller) as the owner of record as of the date your contract to sell to the FHA buyer is executed. Theoretically, you close on your purchase Monday, go into contract with your FHA buyer on Tuesday, and hopefully close with them in 30 days.

While this is a drastic improvement over 91-140 days, it does NOT look like you will be able to do back to back, same day closes to an FHA end buyer. (A-B, B-C). So you can continue counting A-B, B-C simultaneous closings and 1-day transactional funding out in your FHA flips.

2nd: You Still Need Short Term Money
You’ve got to realize that to capitalize on this FHA policy change, you should still be prepared to come up with the short term funding you need for acquisition and to hold the property for a period of time.

In other words, you will still have to buy and fund your deal, then go through the process of selling to the FHA end buyer. The Benefit here, it’s a heck of a lot easier to find 30-60 day money than 90-120 day money.

3rd: Beware the 20% Rule
The waiver implies that if your resale is 20% higher than your acquisition price, you’ll have to show proof to an independent appraiser that renovations and repairs justify the higher price. Keeping good records during your fixer projects is paramount! You can probably expect to be asked for your receipts, before/after photos and other records as proof of what’s been done to enhance the value.

Also, realize that because of the extra scrutiny you’ll likely face in underwriting, you might have a real challenge flipping houses where you just happen to get a smoking deal, and want to sell to an FHA buyer with little or no rehab involved. This may be a red flag if one gets greedy. But, (for example) if you buy a property for $100,000, resell it for less than $120,000, you should be fine.

4th: Is There a Flipping Pattern?
The subject property cannot display a pattern of previous flipping activity. While this seems, and is, a little subjective, it could mean that if the property has already been wholesaled in the last 12 months, the FHA may flag it and disapprove.

The smart move would be to check the last year’s title and make sure it hasn’t changed hands much...hopefully not at all.

Other Important Points:

• All transactions must be arm’s length. In other words, no family member, business colleagues and basically don’t "try to pull a fast one".

• Assignments of a contract for sale will likely raise a red flag. Keep it clean and straightforward on your FHA flips.

• Entities such as LLCs, corporations, and trust must be properly established and operating in accordance with applicable state and Federal law. Again, watch the fancy stuff.

The Bottom Line is This:
The FHA "no flip" waiver is welcome news and will open up many opportunities for investors in 2010. There’s a lot of money to be made in the FHA buyer arena, and now our nation’s "housing authority" has taken one small step to try to address the lack of liquidity in the residential real estate market. Although not a perfect step – it’s a step nonetheless, and a positive one.

Again, you should read the waiver for yourself, understand what it is and what it isn’t, and how to apply it to your own real estate investing endeavors.