House Flipping and the New FHA Seasoning Regulations
Posted on October 19, 2008
The popularity of wholesaling is evident in the number of house flipping shows we see on cable tv. Many new and seasoned investors see house flipping as the perfect way to grow one’s investment and even earn a living. However, it’s also being misused by fraudsters.
This is a practice that is casting a pall on anyone investing in flips and even giving out house flipping advice to other investors. The number of first time homeowners losing their homes because they paid too much for flipped houses is such that there are now some FHA rules in effect to protect the market.
You can bet that these new rules are wreaking havoc on those honest real estate wholesaling investors like us.
How Did These Rules Come Into Effect?
The US Department of Housing and Urban Development (HUD) noticed that there were quite a few homes going into foreclosure in past years. A lot of these homes were owned by first time low income homeowners. Most of these homeowners obtained government backed loans such as from the FHA, VA or Fannie Mae. These are all loans that are protected by Principal Mortgage Insurance (PMI) that is provided by HUD.
So when the homeowners ended up losing their homes because they couldn’t afford the over inflated prices or deal with major repairs, you can imagine who ended up covering the cost of that mortgage? HUD!
This is why HUD has passed these FHA rules which are really clamping down on real estate wholesaling. The rules in their entirety are published in a document called, ‘Prohibition of Property Flipping in HUD’s Single Family Mortgage Insurance Programs; Final Rule; 24 CFR Part 203, Doc. No. FR-4615-F-02.’ You can usually obtain the entire document from the government’s Federal Register Site.
However, the main points of the new FHA rules are basically:
Real estate wholesaling properties resold within 90 days of their last purchase won’t be able to get financing with FHA mortgages covered with HUD insurance.
Anyone reselling a property between 91 and 180 days of purchase has to document the resale value if it’s a certain percentage higher than the last purchase price.
If the property is being resold between 91 days and 12 months of its last purchase, HUD may require that the mortgage lender get additional documentation of the property’s value. This is if its resale value is 5% or greater than the lowest sales price of the property in the last year.
As you can plainly see, these FHA rules make it difficult for real estate investors to ‘flip’ a property by selling it to anyone with a lender using HUD covered insurance. These rules are also commonly referred to as ‘seasoning issues’. You’d have to hold the property for at least three months before you could sell it to a buyer with financing of this type.
There are only three standard exceptions to these rules. They are:
The resale of HUD real estate owned property.
The resale of a property purchased by an employer for the relocation of an employee.
The sale of a newly built home by the builder.
These exceptions don’t apply to real estate wholesaling. However, there are plenty of other buyers in the real estate sea and you’ll find that you can still make big profits in real estate wholesaling or the still popular practice of house flipping.
House Flipping Advice for dealing with Seasoning:
Document all costs and profits with each real estate wholesaling deal. This means keeping all of your receipts and creating a personal record of whom you paid for what and what kinds of improvements were made to each property.
Sell only to other investors. A lot of real estate wholesaling investors simply avoid the FHA rules by selling their properties cheaply to other investors who tend to pay cash for the property rather than looking for a homeowner who will seek a mortgage.
Sell to Homeowners with Non-Conforming Loans. Even though lenders with HUD covered insurance are unable to provide mortgages on your house flips, there are still a lot of other mortgages out there that don’t require or use PMI. These are often more traditional loans made to homeowners who can make large down payments and are more likely to purchase a very nice remodelled house anyway. So, if you are into buying cheap houses and investing a lot to really fix them up, keep this bit of house flipping advice in mind.
Lease-to-own your house flips. The FHA rules only apply to recently purchased homes. If you opt to let your new or first time buyer lease-to-own the property instead of going after immediate profits you’ll avoid seasoning issues entirely. Since, the homeowner won’t need to worry about getting a mortgage to pay off the property for a few years; you don’t have to worry about them being denied because the property was recently purchased.
Even though the FHA rules are stiff, there are still plenty of ways to flip a house. You could say that the rules help both real estate wholesaling investors and HUD by keeping those fraudulent deals out of the market.
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