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Flipping Back in Fashion?

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Posted On: 06/17/2015

QUESTION:

Home prices in our area have been on this rise. Does this mean real estate flipping will make a comeback? If so, will buyers be able to purchase using Federal Housing Administration loans?

ANSWER:

There always has been real estate flipping – the purchase and quick resale of a property. This is no different than flipping stocks or bonds. Some number of flips have been tainted with falsified appraisal and loan applications, often, if not usually, without the knowledge of the buyer. These illegal flips routinely wind up in foreclosure, and that’s a problem for the FHA program. The reason is that the FHA is an insurance plan, so if a loan goes bad the FHA pays loss claims from lenders.

In an effort to control losses from illegal flipping, the Department of Housing and Urban Development moved in 2003 to limit such transactions with what is now generally known as the “HUD rule.” In essence, the rule said that FHA mortgages could not be used to finance a real estate sale where the property had been re-sold during the past 90 days. Many lenders and investors in the private sector adopted the same rule.

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Unfortunately, the 2003 rule was too broad. As a result HUD carved out exceptions for such things as real estate inheritances, foreclosures and markets where a presidential disaster area had been declared. However, the rule hit legitimate flippers, including rehabbers with the ability to quickly buy and refurbish homes.

In 2010 – and with a need to re-start the housing sector – HUD waived its anti-flipping rule, meaning FHA financing was available to buyers of flipped homes. This did not mean anyone could get a mortgage or that a mortgage would be automatically granted. Instead, it meant that with an arms-length transaction, an appraisal and a verified and documented loan application a qualified borrower could get FHA financing even if a home had recently been resold.

Apparently the housing sector is now back on its feet. Starting June 15, 2015, HUD again is bringing back the 90-day rule. Unlike the 2003 rule, HUD is including exceptions in the new standard for such situations as properties acquired by inheritance, government sales, sales by nonprofit organizations and properties acquired by a relocation service for resale.

In addition, HUD requires two appraisals for FHA financing if the property is resold between 91 and 180 days and “the resale price is 100-percent or more over the price paid by the seller to acquire the property.”

If an exception can be carved out for profit-making relocation services, why not for rehabbers or – indeed – anyone? Unlike 2003, when no-doc loan applications and toxic mortgages were widely marketed, in today’s world we have tough new lending and underwriting standards that make it difficult to see why HUD once-again needs the 90-day rule.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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