AJ's Blog Spot‎ > ‎

OMG! This is Flipping Hard!

posted Oct 14, 2009, 11:16 PM by Joshua Durrin   [ updated Dec 10, 2014, 8:40 PM ]
Challenges with Seasoning of Title when Flipping

While "flipping" is only a portion of our business, I'm often met with some surprise due to the perceived difficulties in complying with modern government mortgage guidelines when discussing the strategy with others. It's common knowledge among those in the industry that "flipping" houses has its challenges and risk. However, there’s a lot of confusion about overcoming some of the guideline hurdles when "flipping" property to an FHA buyer.

What is the FHA 90-Day Rule?

Well, prior to February 1, 2010, FHA had a very strict rule that paraphrased could be stated as, “If you buy a property, an FHA buyer can't purchase from you for at least 90 days after the original purchase.” Some even interpreted the guideline to mean that the property couldn't even be under contract until 90-days after the transfer was recorded.

Lenders did this in part as a means of mitigating the risks associated with unrecorded transfers. However, as of February 1, 2010, that 90-day seasoning restriction was waived.

What's the Current FHA Guideline?

As of February 1, 2010, FHA now allows investors to resell their properties as quickly as they choose to FHA buyers. The new rule was extended to the end of 2014 so far. That said, however, there are some new rules that FHA has put in place for "flippers." Two important ones for investors to note are as follows:
  1. All transactions must be arms-length, meaning that there must not appear to be any dishonesty taking place between the buyer and the seller. This requirement also flags any prior flipping activity on the home in the previous 12 months to the lender for further consideration.

  2. In cases where the investor wants to sell within 180 days of purchase, and where the sale price exceeds the previous purchase price by more than 20%, the lender is required to take extra steps to ensure the sale is legitimate. This may include a second appraisal and/or a full FHA inspection where only one of the inspections can be paid for by the buyer. It may also include some due diligence on the part of the seller to prove the increase in value with records and receipts from work done on the property.
Some Words of Caution

While FHA allows for quick resales, some banks are still reluctant to lend on them. Some banks are still applying the more restrictive (old) FHA guidelines. While there are plenty of banks that will do FHA "flips", it's important to find one or two well in advance of obtaining the planned flip. Otherwise, be prepared to carry the property slightly longer while a conventional or cash buyer browses the market.

When planning to resell within 180 days, just expect that you will need to have two appraisals on the property and that you (the seller) will need to pay for at least one of them. Alternatively, the broker/lender could pay for it, but those costs are generally passed back to the buyer in some form or another. So, it's likely best if you (the seller) just plan to pay for it.

Keep detailed plans and receipts of your flips, taking plenty of photos of the before and after state of the property. The lender may call on you to provide renovation details, invoices, receipts, etc. to substantiate the work that was done on the property to increase it's value beyond 20%.

There are no specific guidelines on how much work must be done to prove the increase in value. It's mostly at the discretion and experience of the appraiser or underwriter. If either feels that there hasn't been enough improvement on the property to justify the new purchase price (or resale value regardless of the offer), the appraisal will likely come in low, regardless of comps. Because of the comp process, however, you should be prepared anyhow to justify the added value of the property, whether marketing to FHA or not. You may want to refinance and at that time too, the appraiser may need justification of the improvement.

Wholesalers (or investors buying from wholesalers with the intention of flipping the property) should be careful in how the deal is structured as well. Lenders will look for a “pattern of flipping”, or rather when there has been more than one title change (other than a foreclosure) in the past year. Note that in scenarios of double closing or simultaneous closes there would be two title transfers within a very short period of time. Should the lender choose to identify that as a "pattern", they may reject the loan forcing you to exercise on an alternate exit strategy... which could be to wait 6-12 months to resell to another FHA buyer. As such, be prepared to carry the property for that period of time.

It Can Be Done!

So, while there are some newer challenges "flippers" need to be ready for, it is still plenty possible to "flip" properties if that's your strategy.

Be on the lookout in an upcoming blog post for why I kept putting "flip" in quotes as an investment strategy.