One of the main reasons why investors fix and flip houses is because of the large profit after renovating the house. Sometimes an investor may get lucky and find a house that is being sold at an extremely large discount and only needs a small amount of work that can be done within a month or two and then resold quickly. Even luckier, the house may be in a great high-demand area and will sell extremely fast after renovations are completed and it would be considered a “quick flip” for an investor. A “quick flip” as we know it today may not be such a quick flip now that the FHA 90 Day flip waiver is expiring.
WHAT IS THE FHA 90-DAY REGULATION?
Prior to February 1, 2010, the FHA had a rule that stated that if you buy a property, you cannot resell it to a buyer that is using a FHA loan for at least 90 days after you have purchased the property. That meant that you as an investor could not buy a house, fix it quickly and then sell it quickly until 90 days had passed. The only way that you could sell a quick flip property was either 1.) Sell it to someone who was not using a FHA loan to purchase the house within 90 days after you have purchased it, or 2.) Wait until 90 days have passed to sell it to someone who was using a FHA loan to purchase. Most of the time, your end buyer would need or want to use a FHA loan, so there would be a high chance that you would have to choose option #2 (wait until 90 days to sell the house).
As of February 1, 2010, the regulation was waived. From February 1, 2010 to December 31, 2012, the FHA allowed investors to resell their properties as quickly as they wanted to anyone using a FHA loan to purchase the property as long as they followed rules that protected consumers or the end buyer. These rules were originally part of the 90-Day regulation but still stayed in place after the waiver. There is a long list of rules that tie into the 90-Day regulation.
Below are just a few of the rules that still applied even after the waiver:
a.The seller holds title to the property
b. LLC’s, corporations, or trusts that are serving as sellers were established and are operated in accordance with applicable state and Federal law
c. No pattern of previous flipping activity exists for the subject property, as evidenced by multiple title transfers within a 12-month time frame (chain of title information for the subject property can be found in the appraisal report)
d. The property was marketed openly and fairly via MLS, auction, For Sale by Owner offering, or developer marketing (any sales contracts that refer to an “assignment of contract of sale”,” which represents a special arrangement between seller and buyer may be a red flag).
2. In cases in which the sales price of the property is 20 percent or more over and above the seller’s acquisition cost, the waiver will only apply if the lender:
a. Justifies the increase in the value by retaining in the loan file supporting documentation and/or a second appraisal which verifies that the seller has completed sufficient legitimate renovations, repairs, and rehabilitation work on the subject property to substantiate the increase in value or, in cases where no such work is performed, the appraiser provides appropriate explanation of the increase in property value since the prior title transfer
and b. Orders a property inspection and provides the inspection report to the purchaser before closing.
These are just a few of the rules that are put in place during the waiver of the regulation and will most likely still stand after the waiver is lifted. You can view the full list of waiver rules by clicking here.
The waiver was then extended from December 31, 2012 to December 31, 2014. Up until now, we as investors could quickly fix and flip a house as quickly as we wanted, so what does this mean for investors after December 31, 2014 and more importantly why did the FHA make this regulation possible?
WHY THE 90-DAY REGULATION?
In the past, mostly in the 90’s, there were a lot of scam artists who would scam the FHA. Scammers would find houses that were in bad shape, buy them, did minimal work to the house (just enough to make it visually appealing), made fraudulent appraisals, only to resell it to someone with the property still being in bad shape to make a huge profit. The majority of the time, the individual that would purchase the scammer’s property would obtain a loan from the FHA. The scammers would do things such as paint over a leak stain, but not repair the problem or place carpet over a floor that needed repairing. They would quickly make the house look nice. Most of the time, the end buyer of these houses obtained loans from the FHA but could not afford both the repairs and the payments and would default. Also, sometimes the end buyer would be a part of the scam and would obtain a FHA loan to purchase the house only to collect funds and then disappear, never making one payment. This left the Federal Housing Administration at a loss financially. The FHA decided to do something about their losses and the scams they were facing. Then came along the 90-Day Regulations making strict restrictions to anyone selling a home to a buyer using a FHA loan.
WHY THE WAIVER?
After the 90-Day regulation was put in place, it was then waived, but why? In an effort to fix the economy and end the mortgage crises and recession, the FHA waived the restrictions against short-term property flips. It was only meant to be waived for a short period of time, however, it was extended and other rules were added to the waiver from time to time. By waiving the regulation but keeping some rules in place, this eliminated the mortgage fraud but allowed foreclosed and abandoned homes to be repaired and put back on the market for families and new homeowners to purchase. By doing so, this increased the purchases of homes to those who needed housing, improved neighborhoods which suffered from distressed homes, it brought up property values in certain areas, created billions of dollars of investments and made up for the losses that the FHA accrued from mortgage fraud in the past. The FHA is now terminating the waiver because they feel as though the waiver has accomplished its purpose.
WHAT DOES THIS MEAN FOR INVESTORS?
After December 31, 2014 when the waiver expires, investors will have to follow all of the rules in the 90-Day Regulation from the FHA. Beginning January 1, 2015, all properties being purchased with FHA financing will need a 90 day seasoning period between the date the current owner closed on the home and the date the new contract is signed by the new buyer. Just to clarify the 90 day period once again, it is between the investors closing date and the date the end buyer signs the new contract. Also, investors will need to provide a HUD-1 from their purchase as proof of the closed date. (A HUD-1 is a government mandated settlement statement that breaks down the cost of the real estate transaction and itemizes the services and fees charged to the borrower by the lender or broker when applying for a loan for the purchase of real estate) As of 2015, when deciding to purchase a property for a “quick flip”, keep in mind that you will have to wait 90 days from the time you close on the property to resell it to someone else that is using FHA financing.
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