Buying and selling flipped properties can be difficult in this market depending on the financing the buyer is trying to get. For example, conventional financing does NOT have a anti flip policy but many lenders still apply their own rules, and the FHA requires a 2nd appraisal on flipped properties where the seller is making more than 20% profit within 90 days. Here are the rules you need to know that will ensure your flipped transactions will close.
Flipped rules for Conventional Transactions
Just like the VA, Fannie Mae and Freddie Mac does not have a anti Flip rule, as long as the sales price can hold its value with a good appraisal. But once again many lenders will apply their own set of "overlays" over and beyond what normal Fannie and Freddie underwriting guidelines are, to minimize their risk on the transaction. For example I have heard of some lenders asking for 2 appraisals if the profit to the seller is more than 20% etc.
Another issue that comes into play is when a buyer needs to get financing over 80%, because now the buyer has to qualify for mortgage insurance. When "MI" companies have to get get involved in the transaction, they will want to see more documentation to justify the appreciation on the property, so be prepared to document the value increase thoroughly with supporting documentation. Again, the secret to getting conventional financing on flipped properties, is to make sure the lender has No Flip Overlays.
Flipped rules for VA Transactions
There is a misconception out there that the VA has their own set of rules for flipped properties. The VA does NOT have an anti flip rule, but the catch is there are many lenders that do apply their own set of rules (or lender "overlays" as they are called) on a flipped transaction. So the secret here is to use a lender that will not apply any of their own rules on the transaction.
"Overlays" are unique underwriting rules over and beyond what the VA require on a transaction, that a lender will apply to minimize their risk on a transaction. I have several VA lenders that we are approved with that do NOT have any VA overlays for flipped properties, even if fir example the property has more than a 20% profit for the seller within 90 days of acquisition.
Flipped rules for FHA Transactions
The FHA is definitely the program with the strictest flipping rules. Thankfully the FHA extended their "Anti Flipping Waiver" for 2013. The FHA allows financing on flipped properties within 90 days of resale AND more than 20% profit to the seller, as long as certain requirements are met. But NOT all FHA lenders are offering financing on flipped properties within 90 days, as once again many lenders are choosing to apply their own set of rules. * The following 5 rules apply to a property that is being resold within 90 days and there is more than a 20% profit to the seller. *Please note that not all of these rules apply to a flipped property that is being resold and is more than 90 days old.
1. 2nd Appraisal if more than 20% profit within 90 days
The FHA requires a 2nd appraisal if there is more than 20% profit to the seller within 90 days of purchasing the property. The appraisal must clearly address the completed repairs and/or renovation to substantiate the increased value. Also very important, the FHA does not allow the buyer to pay for the 2nd appraisal. So make sure to get this addressed upfront with the buyer who will pay for this 2nd appraisal fee.
2. A home inspection is required
A home inspection is required on all flips by the FHA. The inspector must have no interest in the property or relationship with the seller, and must not receive compensation for the inspection for any party other than the borrower. Usually any and all repairs that are listed on the inspection report will be called out by the underwriter to be fixed by the seller. Remember, on FHA financing the buyer is not allowed to pay for any repairs, so if there are going to be repairs needed, make sure these are addressed with the seller ahead of time so there are no last minute surprises at funding.
3. Health & Safety repairs
Any health and safety repairs noted on the inspection report, not already called for by the appraiser, will be required to be repaired by funding, which means the appraiser will have to go back out to the property and take pictures or the repairs.
4. All transactions must be arms-length
All FHA flipped transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction. For example, some lenders do not allow the escrow company to be affiliated with the buyer or the seller as this is an identity of interest, otherwise a new escrow company will have to be used during the transaction. Sometimes the seller or the REO company who is selling the property will have an escrow company too, so this is not allowed by some FHA lenders, so make sure this is checked up front if there is an affiliation with any two parties on the transaction.
5. A minimum 12-month chain of title is required
A minimum 12-month chain of title will be required on the preliminary title report to determine no pattern of previous flipping activity exists for the subject. If the property has been flipped twice in the past 12 months, it will not qualify for FHA financing.
Address all concerns upfront on any properties
A good idea is to address any concerns upfront on all properties and cross check the type of financing the buyer is getting getting getting into contract. A good rule of thumb is to first of all check the purchase date when the seller bought the property, as this will determine many of the rules above. This will ensure the buyer will qualify for the right loan program and there will be no issues getting the transaction funded. If you have any questions about a flipped property scenario, please do not hesitate to contact me directly at 858-200-9602 so we can address any concerns you have.
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