Although not yet official, the hints are coming fast and furious that the FHA 90-day flip rule waiver will be extended for another year. It is still unknown whether any of the terms will change with the renewal, and if so, which ones might be different. So that being the case, I'd like to submit a nomination for a rule change.
One of the terms that needs a serious revisit, in my not-so-humble-opinion, is what I would call the investor profit minimization rule. This rule states that (paraphrased) FHA is ok with investors buying properties and then reselling them to FHA buyers in less than or equal to 90 days so long as the resale price is <= 20% higher than the purchase price. If the sale price is > 20% higher, then all sorts of onerous documentation and justification kick in. Note that this is a straight purchase price to resale price comparison, i.e. gross profit. None of the investor's expenses are taken into account, such as closing costs, real estate commissions, loan carrying costs, seller contributions to buyers costs, etc. Nor does it consider conditions of sale on the original purchase (foreclosure, etc.), repairs, upgrades, taxes, utilities, HOA dues, and so on.
To put this in perspective, let's consider a typical deal. An investor purchases a foreclosed home on the courthouse steps for $150,000. For simplicity, we will assume he pays cash (and overlook the lost opportunity cost), and that he does the work himself. Let's say he paints, carpets, patches holes in the walls, replaces some fixtures, tidies up the yard, and makes some odds and ends of repairs. A month later, he relists the house for $220,000.
According to the FHA in their infinite wisdom, he should be satisfied to sell for 20% above his purchase price at $180,000, a "profit" of $30,000. Let's see what becomes of that "profit":
$30,000
- real estate comm eg 5% 9,000
- minus repairs, est 10,000 (conservatively; unknown at time of purchase)
- carrying costs 1,000
= actual profit $10,000 $10,000 / $150,000 = 6.7%
Assuming he had a very good handle on his costs, and a good eye for needed repairs, the investor will make 6.7% in as little as perhaps 3 months. Now that may sound like a good return with the bank paying .0nothing% on savings accounts. But it totally discounts his time, labor, expertise, and the very significant risk he took purchasing this property.
Let's face it. We need these properties moved. That is way more likely to happen quickly if they are appealing to buyers. Fixed up properties selling for a higher price will help stabilize neighborhoods and stop the current free fall in value. Where is the fraud here?
In this particular case, the investor sold for $200,000. That slamming noise you hear is sphincters tightening at the buyer's lender and underwriter. But you know what? Good for him! Good for him for doing his homework, finding a property with "the right things wrong" (i.e. easy and inexpensive fixes), and then for purchasing it at an extremely good price. Despite what they would have you believe on late night TV, that is easier said than done. Furthermore, the foreclosing bank was well within its rights to outbid him, but it chose not to. That is where he made his money, not by supposedly ripping off the end buyers.
What he paid for the property is totally irrelevant at sale time. The only thing that matters is what it is worth in its current condition. And we have two, count 'em, TWO appraisals to document that value. End of story.
Comments(7)