Real estate investors are often confused about the flipping rules enacted by the FHA. A simple breakdown of some important terms can easily clear up any confusion.
First, these rules were intended to discourage "predatory flipping" in which homes were re-sold within days at artificially inflated prices to unsuspecting buyers, in a practice no less than mortgage fraud. However, these rules were not meant to discourage the practice of legitimate flipping in which a real estate investor rehabilitates a property and sells it at market value. Nevertheless, even the legitimate flipper needs to be aware of the rules that may affect them, particularly if a buyer of one of their properties decides to obtain an FHA insured loan.
Second, there are many fine points and exceptions to the flipping rules. However, most of the confusion centers around the definitions of terms provided by the FHA. For example, the rules state:
"Re-sales occuring 90 days or less following acquisition: If the re-sale date is 90 days or less following the date of acquisition by the seller, the property is not eligible for a mortgage to be insured by FHA." [24 C.F.R Â§ 203.37a Sale of Property]
So the question becomes what is the definition of "the date of acquisition"? Is it the date of settlement, the date on the deed, or the date of recording of the deed? Further, what is the definition of "re-sale date"? Is it the initial date on the purchase agreement, the final acceptance date on the purchase agreement, the date on the deed, or the date of settlement?
The FHA defines acquisition as the date of settlement, which can be proven with a copy of a HUD-1 from the acquisition. Further, FHA defines the re-sale date as the date on the purchase agreement. As a safe bet, you should expect this to be the initial offer date on the purchase agreement, not the final acceptance date.
In addition to the 90 day flip rule, there is also a 180 day flip rule which states:
"Re-sales occuring between 91 days and 180 days following acquisition: i) If the re-sale date is between 91 days and 180 days following acquisition by the seller, the property is generally eligible for a mortgage insured by FHA.
ii) However, HUD will require that the mortgagee obtain additional documentation if the re-sale price is 100 percent over the purchase price. Such documentation must include an appraisal from another appraiser. The mortgagee may also document its loan file to support the increased value by establishing that the increased value results from the rehabilitation of the property." (24 C.F.R Â§ 203.37a Sale of Property)
If you are skilled at getting your rehabs done quickly, especially within a 90 day time frame, it's important to understand how these rules can affect you. Furthermore, if you are selling a property for more than 100% of what you paid for it within six months, you should be proactive in communicating with the buyer's lender regarding the history of the property. This way, the lender can schedule a second appraisal and request the proper documentation to ensure your deal closes on time.
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