Real estate flippers got a new set of marching orders last week — at least those flippers who want to use FHA mortgage financing.The Federal Housing Administration issued long-awaited final regulations on property flips last Wednesday. The rules take effect nationwide July 7. Flipping involves resales of houses or other real estate shortly after acquisition, typically at a substantial price markup. Say you buy a rundown rowhouse at a bargain price, do cosmetic fixups, and then sell it a month later for twice what you paid for it.
Sounds like a high payoff short-term investment, right? It is. But the FHA found that too many property flips using its insured mortgage program involved outright fraud — hyped appraisals, shell games where property flippers never actually took legal title to the house before selling it for huge profits, sometimes overnight.
Often the end purchaser of the flipped property was not financially qualified, and used fraudulent income, employment and assets information to obtain the FHA loan. Then the buyer quickly defaulted, leaving FHA with insurance losses and a house that was worth nowhere near its appraisal valuation. The flipper, meanwhile, pocketed all the sales proceeds financed with the FHA mortgage.
To rein in such practices, FHA proposed — and last week adopted in final form — new restrictions. Specifically, FHA will now require that:
Only owners of record — listed as such in the local court house real estate recordations — may sell properties that will be financed using FHA insured loans.
Any resale of a property may not occur 90 or fewer days from the last sale to be eligible for FHA financing.
For resales that occur between 91 and 180 days where the new sales price exceeds the previous sale price by 100 percent or more, FHA will require additional documentation of the property’s true value before insuring the mortgage.
The agency may also require additional evidence of the accuracy of appraisals whenever properties are re-sold at high price gains within 12 months.
The FHA 90-day no-flip time restrictions will be waived when the sellers of properties to be financed are:
HUD itself, disposing of its REO (real estate owned) acquired property portfolio.
Sales of properties that were acquired by the sellers through an inheritance.
Fannie Mae, Freddie Mac or other federally-chartered financial institutions disposing of REO.
Local or state housing agencies.
Nonprofit organizations that have previous approvals to purchase HUD REO properties at a discount.
Properties located in a presidentially-declared disaster area, provided FHA has issued a formal announcement of eligibility for a specific disaster area.
Real estate investors, particularly those who specialize in rehabilitations of rundown structures in central city areas, had complained to HUD about possible negative impacts on their business activities stemming from the new rules. But HUD decided that banning most 90-day or under flips, and by scrutinizing flips between 91 and 180 days of acquisition where the price markup exceeded 100 percent, FHA should be able to protect itself against the worst abuses.
Investors with questions about the new regulations can call 1-800-CALL FHA for guidance. The rules are contained in HUD Mortgagee Letter 2006-14, issued June 8.