February 26, 2010

FHA 90 Day Flipping Waiver ... Tips for Buyers and Sellers

It didn’t take long for FHA buyers to “bite” the previously forbidden fruit … flipped homes! The recent 90 day flip rule “waiver” is so fresh (effective date was February 1st) sellers are hesitating to accept offers from FHA buyers because they are worried lenders won’t fund them. It has been a time for calming nerves, double checking underwriting guidelines and reassuring all parties to the transaction that we can do it.

Hopefully this information will help you with your purchase. Make sure there is no relationship between the parties in the transaction. That includes a real estate agent/investor who is flipping and think they can be the listing agent too. It won’t fly.

Buyers and their agents need to be asking questions to learn how much profit the seller is expected to make on the deal. If it’s going to be more than 20 percent, the buyer needs to be prepared to pay for two appraisals. They don’t have to be ordered at the same time. Get the first one done to make sure value comes in at or above the contract price. Then move forward with the second one. Until we get clarification from HUD what to do with different value, expect the lender to use the lower of the two.

Another out-of-pocket expense the buyer needs to be prepared for is the cost of a home inspection. Home inspections are customary in this market of as-is deals but in the case of a flip that involves 20 percent or more profit for the seller … it’s required by FHA.

If you do your homework up front during purchase negotiations you will learn if two appraisals will be needed. Make it a 45 day escrow in that case. Once in contract, this should allow you enough time for the first appraisal to come in before requesting the second. Now that lenders are controlling FHA appraisals, the turn times take longer.

The definition of how profits are determined is a grey area so we are asking HUD for clarity. Here’s an example:

QUESTION: Let’s say a property was purchased at a Trustee Sale and in addition to paying the bid amount, they had to pay delinquent property taxes, past due HOA dues, etc. Are all of these costs weighed in when factoring the 20 percent? What about the cost of selling the property such as Realtor’s commissions, title and escrow, etc? Or is it only the cost of renovations and actual improvements to the property?

ANSWER: The cost of acquisition generally includes all items charged to acquire the home, not to sell the home. Generally acquisition would include seller paid costs (delinquent taxes, HOA, etc). I’m working with a lender who is asking these questions and more to get clarify on what they are defining as “acquisition”. Of course, as long as the cost of repairs or improvements can be documented, this would be allowed to be added to the acquisition.

I’ll update the post when new information becomes available.