Fix and Flip Investor Laws
The Federal Housing Administration (FHA) recently revised its "anti-flipping" rule. The reason for the original ban was a reaction to illegal quick flips of homes that would in turn artificially inflated the homes value well beyond its true market value. Flipping houses and residential real estate investing has been on the rise for several years now. The fast track to finding the property, the auction, the rehab, the rehab hard money loan to selling to a new buyer has changed.
Often what would happen is that Buyer A would buy a low-cost house in need of repair and would only do minor cosmetic changes and would then resell the home at a significantly higher price within a matter of days to Buyer B, who was also part of the scam. This would continue for the next month or two involving a bunch of serial flippers and would result in higher and higher prices spiraling upward and over-inflating the price of the home.
Ultimately, a legitimate hapless buyer would wants to buy the flipped home would apply for an FHA low-down-payment loan. More times than not that buyer would default on the home because of the overly inflated price and therefore would leave the FHA with a foreclosed house on its books and a hit on its insurance funds.
Now the federal government hopes that with the revised ruling it will simultaneously help low-down-payment home buyers as well as investors who fix and flip foreclosures, and furthermore help local communities that are burdened with too many bank-owned and foreclosed homes.
For much of the last decade the FHA maintained its 90-day anti-flipping rule, but now it's suspending the policy for at least a year. FHA Commissioner David H. Stevens in an advisory to mortgage lenders said, "The agency would once again provide mortgage insurance for some purchases in which the seller had closed on the property less than 90 days earlier. The objective will be to speed sales of renovated houses to first-time buyers and other purchasers."
Nowadays with foreclosures at all time record highs including nearly 3 million filings last year alone, many communities today are faced with an excessive amount of bank-owned properties still on the books, unsold and often in very poor condition.
However, now by waiving the 90-day rule, private investors may be more likely to bid on these stagnate houses, fix them up and in turn sell them to buyers who are able to gain early access to FHA financing that offers 3.5% down payments.
According to some investors who specialize in acquiring and renovating foreclosures and bank-owned properties say the significance in the FHA change in the 90-day timeline is huge. Los Angeles area investor Paul Wylie said, "Now [his] group can buy a house, fix it up and list it for resale all within 60 days."
"A lot of the people who want to buy our houses just don't have 10%," Wylie said. "But they can afford a 3.5% FHA down payment."
Furthermore some very lucky buyers will also be able to combine the $8,000 federal tax credit along with the 3.5% FHA financing, but their contracts must be signed by April 30 and escrow has to close by June 30, when the credit program expires.
The FHA's newly revised policy provides two key restrictions designed to protect end buyers as well as the FHA:
- For all those involved in the homes transaction: buyers, sellers, realty agents or others involved in the deal, there cannot be any game playing and/or conflicts of interest.
- Home price run-ups must be modest and justifiable from the time of the investor's acquisition of the home to what's paid by the applicant seeking FHA financing with the limit of 20%.
When a homes price goes above 20% the FHA will expect all of the participating lenders to provide extensive documentation of the renovation expenditures made by the investors in order to justify the increased home price.
Also mortgage lenders will be required to order an independent property inspection so the buyer can know the home's overall physical condition and the all the improvements made to it.