FHA/HUD Rules
Lender · California and Florida · Member since 2008 · 319 posts · 194 votes
We recently had FHA on our radio show and this seasoning rule doesn't look like it will be going away any time soon according to the their west coast marketing and outreach specialist.
As a hard money lender, we know exactly what investors are doing so we don't have an issue with season at all. However, we know up front about what we'll be dealing with and plan on holding the properties for a while before we'll even start rehabbing.
We are currently attempting an auction as a way to wholetail properties to the public with them understanding they can't come with FHA financing. We still have a few auctions left and about half have worked out.
We have personally sold properties within four days of listing in spite of the seasoning. it just depends on the type of funding the buyers are coming to the table with. More and more it's FHA.
This is REALLY frustrating to me. In Southern California there is really a huge need for affordable lower income housing, in the 50-100k range. In some areas an investor could walk through and buy for 50k and sell for 90k. At 90k the home owner would have roughly a $740 dollar a month mortgage with only $2,700 down, and the investor could net 25k per property. But as investors we are handicapped by the long turn around. You can’t even receive an offer in the 90 days for FHA, so you are typically holding property 120 days or more. I am stuck in this holding pattern with a house in Lake Elsinore. It will probably be the last I do in the low price range because of the nightmare this escrow has been. They keep coming back with more hang ups, like “subject property value has increased more than 5% in less than 90 days and requires a detailed breakdown of all improvements with the associated costs and may require a second full appraisal.†Does anyone have any thought or ideas on this?
I do not wish to criticize, but I have found the Norris Group's postings (here and elsewhere on the Internet) to be long on theory and short on detail. It was claimed at another board that lenders exist for end buyers and that these lenders don't require seasoning in order to use new value for a subsequent purchase. When asked specifically for the names of such lenders, there was no response.
If hard money is used for end buyers to purchase a flipper's property, what's the end buyer's down payment requirement, FICO score/credit history, what is the interest rate charged to the end buyer and for how long? If the interest rates are typical for hard money lenders (double digit), how is the end buyer going to afford the resulting monthly payment and for how long?
I would like to see, in clear detailed language, with dollar figures, how the purchase-auction-sale of a typical flip works. I'm really weary of real estate gurus claiming you can flip your way to millions when the practical reality is that major obstacles exist.
The hard money program we have is only for investors. We do not work with owner occupants. Flippers sell the home and our loan gets paid off.
We can't dictate what buyers come to the table with when we sell properties. We can ask they get pre-qaulified with our lenders to protect ourselves from pointless transactions but that's about it.
If they don't have a lender of choice we can recommend but we can't dictate.
If they come to the table with non-FHA financing, the seasoning rule does not apply and we can sell quickly without fear of the FHA rule. In the areas we are working (Moreno Valley, Riverside), most buyers are coming with FHA because of the low downpayment. All first time homebuyer money is gone (Nehemiah Program and the local city program). With cities getting millions of dollars from the government, I believe most will throw a good portion back to the first time buyer programs (so we hope).
To read about FHA directly, try the link below.
http://portal.hud.gov/portal/page?_pageid=73,3912104&_dad=portal&_schema=PORTAL
It's funny you bring up an example because I've been working on a sheet that gives a real example of a hard money loan. This doesn't include the sale side but helps understand the hard money side. Still working on it but I'd love feedback.
http://www.thenorrisgroup.com/hard-money-example.html
And Caitlyn, I sometimes post in a thread and don't track it or ever go back. There's so much to follow on these forums. The only other board I'm on is SDCIA. I can't find the thread you mentioned. Did you email me directly and I didn't get back to you? Cause if you did, that's not very like me. I apologize if I did.
As a side note, flipping isn't easy and there are obstacles that move. Financing is a moving target and one we're watching carefully right now with all the government intervention.
It's not "government intervention" that makes not only FHA but conventional lenders skittish about flipping. It's common sense.
If you were a lender, would you be fine with Mr. Jones buying a property in January for $100,000 and selling it in February to Mr. Smith for $200,000? From whence did all that solid new value magically appear--especially in a declining market?
One can say, "Well, this is America where we buy low and sell high," to which the lender would say, "Knock yourself out, but you're not getting any of OUR money to do it."
Again, I'm saying that real estate gurus talk about flipping properties to beat the band, yet they never seem to know who these mystical lenders are that don't have seasoning issues.
The whole subject is frustrating. I feel like this guy...
http://www.youtube.com/watch?v=OaiSHcHM0PA
Aaron Norris wrote: We can ask they get pre-qualified with our lenders to protect ourselves from pointless transactions but that's about it.
Aaron, who are your lenders and do they have seasoning requirements?
There are no mystical lenders and we all have to deal with the same restrictions. If a buyer is coming in with FHA, 90-day will always apply. That’s why I posted the seasoning rules above to clarify. If they come conventional, the 90-day does not apply unless the lenders have created their own seasoning rules which is entirely possible considering the loan climate. We’ve been dealing with FHA buyers almost 100% of the time so I have no resources for you. The one instance I said was back in January and I clarified that by saying I wish they were all that easy.
To your question: I’m not going to list our ONE lender (who is actually one person) on this forum. He’s part of our team. And NO, he doesn’t get around 90-day seasoning rules so it’s not what you’re looking for anyway. However, I do have another great resource that’s specializes in fixing credit if you want it. PM me.
Common sense is letting private investors take this beat up REO inventory and making it livable again. There is no magic value added. The stuff we buy has typically been on the market and vacant for six months to one year (or more), has been vandalized and in need of major renovations, is an eye sore to say the least, and no regular lender will lend on it because it’s unlivable.
You have to buy low and sell high to be in the buy/sell business. It’s not easy and as I said above, it’s work and a moving target. If it doesn’t pencil, you lose money. Unlike Flip This House, we actually have to count for price declines, labor, material, holding, and closing costs.
I should have been more specific about the auction. Instead of “publicâ€, I should have put “investors and strong retail buyers†that could put down a substantial (20% or more) down payment. We test things all the time and this was our attempt to collect names of BUYERS that were able to come to the table with other than FHA financing so the seasoning issue was not a problem. These buyers would more likely be looking at a buy-to-live-in or buy-and-hold-for-rental scenario. The auction didn’t do exactly what we had hoped and the two that went for a decent price we’re still waiting to see if they close. So we’re back to selling retail to end consumer which we will always assume will use FHA.
We’ve asked FHA directly if there was a way around FHA or if they planned on relaxing the rules and they said no. We’re not trying to get by FHA seasoning rules and I wouldn’t suggest you try. It’s part of our holding costs and we plan for it.
The Norris Group does not “flip†to other investors at this time. We buy at auction or through the MLS, fix them up, and the sell them retail. We don’t advertise that as part of our training. It works sometimes but is very difficult in this market.
We aren’t buying them with a large enough spread most of the time to enable another investor to take over and fix it with the intent to sell retail and make a profit. The market has been dropping too fast in our area for this to be a good exit strategy and the banks are already taking such a price hit, it’s hard to get them low enough to make that possible. As bulk deals get more popular, that will help. You only stick someone with a bad flip once. You lose a friend, a client, and your reputation so we are being very careful about anything like you’ve suggested.
To your point about value, there's a big difference between fixed up inventory and inventory that's have-to-sell. We're putting in anywhere from 25k-50k in repairs for most of the houses we buy and sell. It’s a lot of risk and a lot of work. You can’t just throw on glossy white on all the walls and the cheapest carpet (like some banks are trying to do) and expect to full retail. The average consumer can’t expect to get a loan on some of the REO stuff because they’re not livable. We have to deal with bank-appointed independent appraisers like everybody else too. We document our work and do a good job. The neighborhood and the cities in which we work are now understand what we do and are glad when we show up. They seem to have forgotten from my Dad’s work back in the 90s. See the links I posted above for samples.
I have followed very closely the threads about seasoning issues, and have yet to see ANY that claim they can get around them. Quite on the contrary, I believe it has been very clear from Aaron that there are no magical ways to skirt seasoning. It is important to understand exactly what seasoning issues ARE and this has also been made very clear by Aaron and others on this forum. (Thank you for the link on FHA details, I will forward this to my escrow gal as I am tired of her saying “Well, because you are a corporation, you don’t have to worry.â€)
-"It's not "government intervention" that makes not only FHA but conventional lenders skittish about flipping. It's common sense."
I guess that is why most seasoned investors don't like the word "flip." It has been a term made popular through television shows, but has a connotation of fraud in the lending world. I know that The Norris Group uses the term “Wholesale" “Rehab†and "Retail" and usually avoids the word 'flip' as it is not specific enough and leads to confusion. Some people use ‘flip’ to describe a wholesale deal to another investor. Some use it to mean rehab and retail.
I have recently had an FHA underwriter tell me that if I were to produce receipts and a detailed rehab/cost sheet it might be possible to waive the 90 day hold. I produced the required documents and still had to wait 90 days! So I don't even think that is going to get us out of FHA seasoning.
Sorry if this post sounds like I am defensive about criticism against the Norris Group, but if you knew them and had worked with them you would understand. There isn’t a group of people on the planet more helpful and knowledgeable about rehab and retail investing willing to share their knowledge to help others. I know I am not the only one that feels this way!
Aaron Norris wrote: We're putting in anywhere from 25k-50k in repairs for most of the houses we buy and sell.
The last time I heard Bruce Norris speak, he said he purchased 6 houses the previous month, did nothing but paint/carpet and immediately sold them at new value and pocketed his profit. Allegedly, the end buyer's lender had no problem with lending on new value.
Also, I perceive that hard money lenders (for wholesale purchases) are qualifying just like institutional lenders: credit check, full doc and 20% down.
No condemnation here; just stating the facts for discussion purposes.
I'm trying to consolidate this discussion at http://tinyurl.com/5u7vff so that summerhomes won't have to work so hard to defend the Norris Group. You'd think I said that his grandmother is a hooker. (teasing you, summerhomes) Perhaps, for the purpose of this discussion, we should merely say Hard Money Lender. The Norris Group, in particular, is irrelevant to the subject we're trying to clarify.