FHA’s “property flipping” waiver policy has been extended. The waiver is now effective for fully executed purchase contracts dated between Feb. 1, 2010 and Dec. 31, 2012 (the waiver was scheduled to expire Dec. 31, 2011).
To prevent “property flipping”, FHA requires that the seller be recorded in title in the public property records. They also prohibit and assignment or sale of the contract to get around this rule. If a seller is the owner of record for 90 days or less, the property is not eligible for FHA financing.
Some entities are exempt from the 90-day rule.
- HUD Real Estate Owned/HUD Property Disposition Properties
- Properties owned by employers or bona fide relocation agencies that contract with employers to handle the relocation of an employee.
- When a builder is selling a newly constructed home or is building a home for a FHA homebuyer.
- Inherited properties (Documentation evidencing the inheritance must be obtained and included in the case binder when submitting for insurance.)
- United States government (federal) agencies. Eligible agencies include but are not limited to: Department of Veterans Affairs (VA), Rural Development (RD), and Federal Deposit Insurance Corporation (FDIC).
- State and federally chartered financial institutions and Government Sponsored Entities (GSEs) such as FNMA and FHLMC.
- Non-profit organizations approved to purchase HUD Real Estate Owned single family properties at a discount with resale restrictions. ( List available at: http://www.hud.gov/offices/hsg/sfh/np/np_hoc.cfm )
- State and local government agencies.
Properties foreclosed on by mortgagees, their subsidiaries, as well as vendors hired by exempt entities to sell their real estate owned also qualify for the 90 day exemption through 12/31/2012.
In order to qualify for the waiver and allow FHA financing, the following must be met:
All transactions must be arm’s-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction. Some of the ways to insure there is no collusion or agreement between the parties is to verify that the public records show the seller listed on the contract is in title and to prohibit simultaneous closings. Some additional requirements are:
- No pattern of previous flipping activity exists for the subject property, as evidenced by multiple title transfers within a 12-month time frame
- The property was marketed openly and fairly, via MLS, auction, for sale by owner offering, or developer marketing (Any sales contract that refers to an “assignment of contract of sale” which represents a special arrangement between seller and buyer is not allowed.).
- No re-dating of the executed purchase contract is allowed.
The buyer’s real estate agent cannot be the seller, or cannot be employed by, related to, or affiliated with the seller.
In cases in which the sales price of the property is 20% or more over and above the seller’s acquisition cost (what the seller paid for the property – does not include repairs made after purchase), the following is required:
- Supporting loan documentation must be provided and in the file that justifies the increase in value, and
- A second appraisal which verifies that the seller has completed sufficient legitimate renovation, repair and rehabilitation work on the subject property to substantiate the increase in value or, in cases where no such work is performed, the appraiser provides appropriate explanation of the increase in property value since the prior title transfer; and
- A property inspection report that is provided to the purchaser before closing. The use of FHA-approved inspectors or 203(k) consultants is not required. The inspector must have no interest in the property or relationship with the seller, and must not receive compensation for the inspection from any party other than the borrower or the lender. Also, the inspector may not compensate anyone for the referral of the inspection. Additionally, the inspector may not receive any compensation for referring or recommending contractors to perform any repairs recommended by the inspection, and may not be involved with performing any repairs recommended by the inspection. At a minimum, the inspection must cover:
- The property structure, including the foundation, floor, ceiling, walls and roof
- The exterior, including siding, doors, windows, appurtenant structures such as decks and balconies, walkways and driveways
- The roofing, plumbing systems, electrical systems, heating and air conditioning systems
- All interiors
- All insulation and ventilation systems, as well as fireplaces and solid-fuel-burning appliances
There are additional requirements for FHA financing when the seller has been in title between 91 and 180 days and the purchase price is more than 100% of the seller’s acquisition cost and these include the use of a 2nd appraisal to verify.
Please contact me directly for more specific information on a transaction you may be considering.