FHA to extend
rule permitting loans on ‘flips’ of fixed-up homes
By Kenneth R.
Rehabbers and real estate investors rejoice: You’ll still be able to sell
houses to first-time buyers using low-down-payment FHA-insured
mortgages next year, even if you’ve owned the fixed-up property for less than
Housing Administration has decided to extend its rule permitting loans on quick
“flips” of renovated houses beyond the scheduled Dec. 31 expiration
deadline. The policy is widely considered one of the key federal government
moves that has encouraged private investors in large numbers ‹ often
mom-and-pop, small-scale operations ‹ to buy foreclosed and deteriorating
houses from lenders, then repair them and resell within short periods of time.
Since the plan
was first put into place by the Obama administration in February 2010, more
than 65,000 renovated homes have been financed using more than $11 billion in
FHA-backed loans, according to federal officials. Roughly 23,000 of these
properties were acquired and resold with FHA loans within the last year alone.
according to acting FHA Commissioner Carol J. Galante, is to help
“stabilize real estate prices as well as neighborhoods and communities
where foreclosure activity has been high” by making it easier for
investors to buy, fix up and sell run-down homes that add to urban blight and
purchasers of the renovated properties are first-time, moderate-income families
who might otherwise be frozen out of the market because they don’t have the
down-payment cash required for a conventional loan. FHA down payments can be as
low as 3.5%.
administration’s initiative in 2010 represented a reversal of earlier
restrictions on flips first imposed in 2003. After scandals in Los Angeles, New
York, Baltimore, Washington, D.C., and other large cities over widespread
fraudulent flips ‹ in which houses were sometimes resold for double their
previous price within days or even hours ‹ the FHA stopped insuring loans on
houses whose sellers had owned them for less than 90 days.
Paul Wylie, a
Los Angeles-area investor active in renovating distressed properties, welcomed
the extension of the FHA policy because “it allows predominantly
first-time buyers to compete with cash buyers, investors and others” for
houses at affordable prices that have been professionally repaired. In some
neighborhoods in and around Los Angeles, many homes that have been
rehabilitated for resale within 90-days are what Wylie calls “foreclosure
flips, short-sale flips or standard-sale flips.” The FHA is pretty much
the only financing available for moderate-income, owner-occupant buyers of
these renovated properties.
Calabrese, chief executive of Equitable Mortgage Corp. in Columbus, Ohio, says
the essential ingredients in the FHA’s revised approach are its strict controls
on appraisals, inspections and chain of title ‹ all designed to ensure
“that there is no funny business going on.”
policy requires property sellers to comply with a detailed list of standards.
Among the most prominent:
€ You can’t
play games on ownership. All transactions must be arm’s length with “no
identity of interest between the buyer and seller or other parties”
involved in the sale. You can’t buy a house from your uncle at a bargain price,
hire your brother to do a few quick repairs to it, then resell it for a huge
profit to an unsophisticated buyer, supported by a hyped-up appraisal signed by
a friend or partner.
€ The seller of
the rehabilitated house must have clear legal title to it. This may sound
elementary, but some flippers during the late 1990s never bothered to acquire
title and record it. They took over the property one day, slapped a little
paint on the outside and sold it for cash the following day.
€ If the
selling price is 20% higher than what the house cost the seller, a second
appraisal, conducted by a member of the FHA’s panel of approved appraisers, is
mandatory to be certain that the improvements made to the property justify the
independent inspection report, conducted by a professional with no connection
to other participants in the transaction, is also mandatory when the price jump
is more than 20%. If there are repairs that are still needed that could affect
the “health and safety” of the purchasers, they must be completed and
a re-inspection conducted before the closing.
Flipping under the FHA’s rules should continue to be an important option for
buyers of renovated, previously distressed houses and the investors who make it
their business to find them and fix them up.