Starting February 1st, HUD is suspending the FHA’s 90-day anti-flipping rule for one year. This is a smart idea which should increase local home sales, help investors and create additional real estate demand (because more FHA financing will be available).
The New Rule
HUD says that under the new rule homes sold within the past 90 days may be sold again with FHA-backed mortgages. However, there are some caveats:
- All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.
- In cases in which the sales price of the property is 20 percent or more above the seller’s acquisition cost, the waiver will only apply if the lender meets specific conditions.
- The waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program.
Not just any old transaction will do within 90 days. According to HUD:
All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction. Some ways that the lender can ensure that there is no inappropriate collusion or agreements between parties is to assess and deternune the following:
a. The seller holds title to the property;
b. LLCs, 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).
20% Price Increase
HUD remains very much on the look-out for illegal flipping and one way it does this is to look for price increases of 20 percent or more. The idea is not that there’s a limit on price increases, rather the increase must be justified.
For those who fix up homes this is a problem because legitimate price increases of 20 percent and more may well justified by repair and renovation work. Since the onus is on the seller to justify a higher price, owners should hang on to receipts and have plenty of before and after photos to show lenders if necessary.
Here’s what HUD says:
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 thc lender:
a. Justifies the increase in value by retaining in the loan file supporting documentation and/or a second appraisal which verifies that the seller has completed sufficient legitimate renovation, repair, 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 since the prior title transfer; and
B. Orders a property inspection and provides the inspection report to the purchaser before closing. The lender may charge the borrower for this inspection. The rise of FHA-approved inspectors or 203(k) consultants is not required. The inspector must have no interest in the property or relationship with the seller, and must not receive
compensation for the inspection from any party other than the lender. Also, the inspector may not compensate anyone for the referral of the inspection. Additionally. the inspector may not receive any compensation for reffering or recommending contractors to perform any repairs recommended by the inspection, and may not be involved with performing any repairs recommended by the inspection. At a minimum, the inspection must include:
i. The property structure, including the foundation, floor, ceiling, walls and roof:
ii. The exterior, including siding, doors, windows, appurtenant structures such as decks and balconies, walkways and driveways:
iii. The rooting. plumbing systems, electrical systems. heating and air conditioning
iv. All interiors: and
v. All insulation and ventilation systems, as well as fireplaces and solid-fuel-burning appliances.
So why does HUD have a 90-day anti-flipping rule in the first place? Ah, therein lies a tale….
In basic terms the rule was designed to limit the ability of illegal flippers to quickly turn over properties. The rule arose several years ago after HUD discovered that it was the owner of hundreds of illegally flipped homes in Baltimore, homes financed with FHA mortgages which soon defaulted. The result was lots of claims against the FHA system by the lenders who made such loans. HUD lost millions of dollars.
The hallmark of these sales was that home values quickly rose. A home could be sold several times, maybe several times in a day, and somehow the value magically rose. The higher sale value — supported by somehow appropriate appraisals and paperwork — could be financed with a larger loan. When FHA financing was used it meant that HUD had insured loans secured by properties which were grossly overvalued.
The result of the Baltimore experience was that the government created the 90-day rule in 2003 in an effort to stop illegal flipping. Under the rule, said HUD, “if a property is re-sold 90 days or fewer following the date of acquisition by the seller, the property is not eligible for a mortgage insured by FHA. FHA defines the seller