What Are the Rules on Property Flipping?

Property "flipping" occurs when a recently acquired property is resold for a considerable profit with an artificially inflated value. But what are the rules in this situation?

Predatory lending results when home purchasers become unwitting victims of lenders, sellers and appraisers, often working together. The unsuspecting homebuyers either purchase homes with sales prices far in excess of the fair market value, or are substantially overcharged with costs associated with obtaining a mortgage.

The final rule, "FR-4615 Prohibition of Property Flipping in HUD's Single Family Mortgage Insurance Programs," makes recently flipped properties ineligible for FHA mortgage insurance. It also allows FHA to better manage its insurance risk by requiring additional support for a property's value when a significant increase between sales occurs. Features include:

Sale by Owner of Record: Only the owner of record may sell a home to an individual who will obtain FHA mortgage insurance for the loan; it may not involve any sale or assignment of the sales contract, a procedure often observed when the homebuyer is determined to have been a victim of predatory practices.

Time Restrictions on Re-sales: **Important for Investors**

Re-sales occurring 90 days or less following acquisition will not be eligible for a mortgage to be insured by FHA. FHA's analysis disclosed that among the most egregious examples of predatory lending was on "flips" that occurred within a very brief time span, often within days. Thus, the "quick flips" will be eliminated.

Re-sales occurring between 91 and 180 days will be eligible provided that the lender obtains an from an independent appraiser based on a re-sale percentage threshold established by FHA; this threshold would be relatively high so as to not adversely affect legitimate rehabilitation efforts but still deter unscrupulous sellers, lenders, and appraisers from attempting to flip properties and defraud homebuyers. Lenders may also prove that the increased value is the result of rehabilitation of the property. ' Buyer cannot pay for the second appraisal and seller must document cost of all repairs.

Re-sales occurring between 90 days and one year will be subject to a requirement that the lender obtain additional documentation to support the value to address circumstances or locations where HUD identifies property flipping as a problem. This authority would supersede the higher expected threshold established for the above-mentioned 90 to 180 day period and will be invoked when FHA determines that substantial abuse may be occurring in a particular locality.

We are amazed at the number of people who have no idea these rules exist. Many investors think you can sell a property as soon as you have completed the renovations, maybe as quickly as 2 to 4 weeks. Unfortunately, that is not the case. Not only does FHA have strict guidelines on flipping, but now a days many conventional lenders have the same or stricter guidelines. Numerous mortgage companies want "seasoned title" for at least 6 - 12 months.

SellState GCR have become leading experts in how to quickly sell your renovated property. Our "flipping" expertise, along with our mortgage background, have proven to be extremely valuable in helping many local investors sell their rehabs. Remember, you still don't make any money on your fixer upper until you successfully sell it!