Below is my recent article as published in 6 Southern California newspapers.
By Brent Bruce
Just this last Friday the 15th of January, H.U.D (The Department of Housing and Urban Development) and the F.H.A (Federal Housing Administration) announced a waiver of a long time guideline that will be a great help for both home sellers and potential home buyers looking to use an F.H.A. insured home loan.
For many years now the F.H.A. prohibited a buyer who is using an F.H.A. loan from buying a property that had been owned by the seller for less than 91 days. This rule is commonly known as the “90 Day Anti-Flip Rule”.
The purpose of this rule was to prevent predatory practices by people who would buy homes for below market value through special relationships with sellers, and turn around and sell the home to unknowing buyers at inflated prices.
While this rule has its purpose, it can and has had a negative side effect for many real estate buyers and sellers.
Many real estate investors buy damaged homes at minimal prices by paying cash. Cash buyers often can buy homes for below market value when the home is in such bad condition that it cannot be financed. These investors then rehabilitate the home by replacing and repairing all damages. Bringing the home back to a good condition makes it now financeable by mortgage banks, and can be resold at fair market value.
As long as the investor can buy and repair the home for a low enough cost that when they sell the home they make a profit, it is a benefit for all involved. The seller, which is usually a bank that foreclosed on the home, is able to sell a damaged home and get it out of their inventory. The investor repairs the home which helps the value, not only of the home being repaired, but also the value of the neighborhood that the home is in, the investor employs the repair workers giving them work, the home is now in good condition for a new home buyer to enjoy, and the investor makes a tidy profit.
However, the 90 day anti-flip rule can throw a wrench into this system. In many cases the investor can complete the repairs in less than 90 days. In fact, many investors do not want to own the house for more than 30 days. If they hold the house for too long it eats into their profit and can cause the house to go from profitable to a loss. If investors do not buy and repair these houses, they may sit on the market for months, vacant and deteriorating.
This 90 flip rule also causes home buyers who are using the F.H.A home loans to lose some home buying opportunities, by not allowing them to act quickly on these newly rehabilitated homes. The selling investors do not want to wait the 90 days that is required so they may sell at a lower price to different cash buyer.
Over the last few years, the F.H.A. has seen these issues and has slowly removed the barrier.
In June of 2006, F.H.A. waived the rule for nonprofit organizations, HUD foreclosures and government agencies, as well as properties acquired through inheritance.
In June of 2008, they broadened the exemption to exclude properties that had been taken back by foreclosure. This meant that banks could sell their properties that the had foreclosed on without having to wait the 90 days.
In September of 2009, they again expanded the exemption to allow buyers using HUD’s Neighborhood Stabilization Program.
And finally, this past Friday the 15th, they have waived the provision completely effective February 1st, 2010 through February 1st, 2011.
As always, there are some rules to this waiver.
If the property sells for 20% more than the original purchase price, the following conditions apply:
- The increase in value must be documented and justified. A second appraisal may be required as well and I would expect that this will be required in all cases by the lending bank.
- The lending bank must order an independent home inspection from a licensed home inspector. This inspection must verify that the property is structurally sound and does not have major repairs still needed.
- This waiver only applies to forward mortgages. Reverse mortgages do not qualify.
Keep in mind that while this is now approved by the F.H.A., the individual lending banks can make additional conditions, or choose to not offer the program at all.
Overall, this is a great move by the F.H.A. It will open the doors wider for both sellers and F.H.A. buyers, helping to spur home sales and ultimately grow our fragile economy.
Brent C. Bruce
Allied Home Mortgage Capital Corp.
8480 Red Oak Street
Rancho Cucamonga, CA 91730
Phone (909) 463-4750
Email – firstname.lastname@example.org
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