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FHA Suspends Anti-flipping Rule — What it Means to You

by Gina Pogol
February 5th, 2010

Beginning February 1, FHA made it a little easier for cash-strapped wanna-be buyers, property investors, and communities hard-hit by foreclosures by suspending its anti-flipping prohibition. What’s an anti-flipping prohibition? FHA would not insure a mortgage on property that had been owned by the seller for less than 90 days.

FHA’s Stance on Home Selling Gymnastics

The reason FHA has historically refused to insure mortgages on flipped properties is that this activity was the MO of major scamming dirtbags. Dirtbag A would snap up a cheap, ugly house, do a little cosmetic work on it, and resell it quickly for a lot more money to Dirtbag B, who was a partner in the crime. The house would be flipped repeatedly over several months until its price was unrealistically high.

Eventually they’d unload the house on some unsuspecting dupe who would take out an FHA mortgage with a low down payment. Of course, the buyer who had little investment in a totally overpriced house would bail on the mortgage and FHA would take a fat loss.

Today, Things Are Different

Today’s foreclosure crisis has spelled disaster for many hard-hit communities, but could mean opportunity for those looking for affordable homes and for the knowledgeable investors who sell them.
The idea is to avoid fraud while speeding up sales of affordable renovated houses to buyers.

Why Is 90 Days Such a Big Deal, Anyway?

Investors who fix up and resell foreclosures say it’s a very big deal. The longer they hang onto property, the more it costs them. Many properties can be rehabilitated and put on the market in a month or two. But in the past, the most likely buyers for these homes couldn’t use FHA financing, and would have to come up with at least 10% down with a conventional lender or buy something else. Often, they opted to buy something else.

Without the 90-day rule, foreclosed properties are more attractive to investors, which stimulates foreclosure sales, and increased demand supports the housing market.

How Can FHA Thwart the Dirtbags?

The new rules don’t allow conflicts of interest among anyone involved — all transactions must be arm’s-length. In addition, price increases between the time the investor acquires and sells the property must be reasonable and justifiable — generally, the limit will be 20% unless the seller can thoroughly document the renovation expenditures to justify the hefty price increase. Like, the place was built on a toxic waste dump, there was a meth lab in the garage, and the owner kept 50 cats in the bedroom. That would require some serious rehabilitation.

For buyers, communities, and investors, FHA’s new stance on flipped houses is a big win-win.

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