FHA 90-Day Seasoning Rule...SUMMARY of the extension

FHA 90-Day Seasoning Rule...SUMMARY of the extension

On Friday January 15, 2010 we posted the FHA’s announcement to suspend their now infamous 90-day anti-flipping rule for 1 year, effective February 1, 2010.

Yes, this is great news for investors trying to flip properties to FHA Buyers! But after reading carefully through it myself, I see there are also some caveats and important nuances you should absolutely be aware of.

First, exactly why is this such good news for investors?
Because for quite some time now investors’ endeavors to earn an honest profit flipping great houses to qualified FHA buyers have been stymied by the FHA’s “No Flip 90-Day Seasoning Rule”. This basically has meant that you couldn’t resell to a buyer using an FHA loan until after you’ve been “seasoned” on title for at least 90 days. In fact, the rule has actually been that you can’t even go to contract until day 91 – which put your closing typically another 30-45 days beyond that at minimum.

So this waiver essentially pushes the pause button on this rule. For at least the next year, starting Feb 1, 2010, investors won’t have to sit on your laurels waiting for 90 days on title before you can sign a contract to sell that beautifully rehabbed house to an FHA buyer.

In an effort to help stimulate sales, the FHA is essentially recognizing that people can buy properties, substantially rehab them and improve the value of them in less than 90 days. And also that, “…the 90-day resale restriction often hinders community stabilization and revitalization.” But only time will tell if they elect to extend this waiver, repeal the rule entirely, or simply go back to the way things were after February 2011.

Crucial Takeaway #1: Seller Must Hold Title
One thing you’ll notice upon reading the waiver yourself is that the “seller” must hold title to the property. In other words, they may very well expect to see you (the investor/seller) as the owner of record as of the date your contract to sell to the FHA buyer is executed. So you can theoretically close on your purchase Monday, go into contract with your FHA buyer on Tuesday, and hopefully close with them in 30 days.

While this is a vast improvement over 91-140 days, it does NOT appear that you will be able to do back to back, same day closes to an FHA end buyer. (A-B, B-C). So you can continue counting A-B, B-C simultaneous closings and 1-day transactional funding out in your FHA flips.

Crucial Takeaway #2: You Still Need Short Term Funding
That’s right, realize that to capitalize on this FHA policy change, you should still be prepared to come up with the short term funding you need for acquisition (especially 30-60 day funding) and to hold the property for a period of time.

Said another way, you will still have to buy and fund your deal, then go through the process of selling to the FHA end buyer. But thankfully, it’s a heck of a lot easier to find 30-60 day money than 90-120 day money.

Crucial Takeaway #3: The 20% Rule
Basically the waiver states that if your resale is 20% higher than your acquisition price, you’ll have to pony up some extra proof to an independent appraiser that renovations and repairs justify the higher price. So keep good records during your fixer projects! You can probably expect to be asked for your receipts, before/after photos and other records as proof of what you have done to enhance the value.

Also, realize that because of the higher scrutiny you’ll likely face in underwriting, you might have a real challenge flipping houses where you just happen to get a smoking deal, and want to sell to an FHA buyer with little or no rehab involved. This may be a red flag. But if (for example) buy a property for $200,000, resell it for less than $240,000, you should be fine.

Criucial Takeaway #4: Is There a Flipping Pattern?
Basically the subject property should not display a pattern of previous flipping activity. While this seems a little subjective, it could mean that if the property has been previously wholesaled in the last 12 months, the FHA may flag it and disapprove.

So you would be wise to check the last year’s title and see if it’ s changed hands much at all – hopefully not at all.

Other Important Points:
All transactions must be arm’s length. In other words, no family member, business colleagues and basically no shenanigans.
Assignments of a contract for sale will likely trigger a red flag. Keep it clean and straightforward on your FHA flips.
Entities such as LLCs, corporations, and trust must be properly established and operating in accordance with applicable state and Federal law. Again, watch the fancy stuff.
The Bottom Line is This:
The FHA “no flip” waiver is great news and will open up many opportunities for investors in 2010. There’s a lot of money to be made in the FHA buyer arena, and now our nation’s “housing authority” has taken one small step to try to address the liquidity in the residential real estate market. No, it’s not a perfect step – but it’s a step nonetheless, and a positive one.




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