When Flipping it’s the FHA’s Way or the Highway

by | BiggerPockets.com

You’ve heard of the Golden Rule right?  Virtually every religion in the world has a version of it.  

There’s the Bible:

“So in everything, do to others what you would have them do to you, for this sums up the Law and the Prophets.”  – Matthew 7:12

And Buddhism:

“Hurt not others in ways that you yourself would find hurtful.”  – Udanavarga 5:18

And even Confucianism: 

“Surely it is the maxim of loving-kindness:  Do not do unto others what you would not have them do unto you.” – Analects 15:23

But did you know that lending institutions like Bank of America, Wells Fargo and Chase, along with the government entities that insure their home loans (i.e. Fannie Mae, Freddie Mac, FHA), have their own Golden Rule?   It goes like this – HE WHO HAS THE GOLD MAKES THE RULES.

The best part about making the rules is that you can change them whenever you want.  More importantly, you can apply these rules subjectively in order to create a more favorable outcome – for yourself.

Last month, my firm sold a house to a buyer that was approved for an FHA insured loan.  If you’ve ever flipped a house in a short period of time (90 days or less) you know what hassle it can be to sell to an FHA approved buyer.  The FHA wants two appraisals (the 2nd must be paid for by the seller) as well as a detailed list of improvements made to the home.  Of course, this only applies if you’re selling the house for more than 20% of what you paid for it. 

Next, you have to repair EVERYTHING the FHA home inspector says needs to be fixed, regardless of whether or not the buyer asks for these repairs.  If you don’t fix them then the FHA will not insure the loan.

Among some of the more ridiculous items we had to fix:

–          Install anti-tipping device on kitchen range

–          Replace cracked roof tile

–          Caulk bottom of toilet fixtures

Now you can bet if I went to this inspector’s home I would find that his house needs these same repairs.  What a joke.  The most frustrating part is that the closing had to be delayed by a week so that the repairs could be made and the inspector could re-inspect the finished job (at a $75 cost to our firm.)

But what could we do?  It’s the FHA’s way or the highway.  They make the rules.  And as I stated earlier they can change them whenever it suits their needs.

safety panel missing FHA inspectionMy brother and his fiancé are about to close on a bank owned home.  They got qualified for an FHA loan, found the house and wrote an offer.  They got the inspection back and there were a number of items they wanted fixed.  The worst of them you can see pictured here.  This is the breaker box.  The safety panel is missing and there’s a 220V plug hard wired into the side. 

Not exactly up to code and certainly a safety issue.  Surely the FHA would require that the seller fix this in order to insure my brother’s loan right?  Wrong.  Neither the inspector nor the FHA had a problem with it.  And why do you think that is?  The seller is a bank.  It’s universally known that banks don’t fix anything.  And since the bank and the FHA are essentially business partners the guidelines are not enforced.  Together they make up the rules and enforce them subjectively.

It’s estimated that about 20% of all loans originated in 2010 were FHA insured.  If you’re fixing and flipping on a regular basis you’ll eventually have to sell to an FHA buyer.  For real estate investors this Golden Rule is an added cost of doing business and an inconvenient truth.

About Author

Marty (G+) is the Chief Financial Officer for Rising Sun Capital Group, LLC, a real estate investment firm based in Gilbert, AZ. His firm purchases homes at the courthouse steps and public REO auctions. They have two exit strategies, either fix and flip or seller financing.


  1. That’s disgusting! It’s no surprise that the ‘golden rule’ has changed – we see examples of it all over the world – but it really hits home when you’re the victim of the hypocrisy and favoritism/bias in the system.

    Our large company has a ‘stupid rules’ committee that goes over past decisions/rules/whatever to see if some common sense can take place instead. Wish the governments would do this!

  2. We’ve been renovating homes for 8+ years. We have done nearly 900. For years it has amazed me that the seller (us) has to show proof of the repairs we’ve made. I didn’t order the appraisal nor did I control it. I understand the reason behind it – to prevent fraud. My point is appraise the house for what its current value is based on the current condition – not the improvements I have put in to it. Fannie mae – probably the largest owner of bank owned properties is now fixing most every home they sell. Completely getting rid of the 9o day rule will help to move through this inventory and get the market back to normal faster.

  3. Yes it is tough but most of the time the appraisals will “call out” those repairs even on a REO and this is where you can make money. You should report the appraisor who missed that electrical panel. We hear from agents all the time that they LOVE our homes because they are perfect. Of course we get those random repair request too.

    • Dennis, can you elaborate on how you make money on the repairs? I’m assuming it’s because you can ask the seller to lower the price? The banks aren’t doing that much here in Arizona. Many of the REO properties sold on the MLS are receiving multiple offers so the banks have all the leverage.

  4. It is always a good idea to leave 1 or 2 stupid little things wrong with the house for an inspector to find, and can be fixed really easy, so they don’t feel they have to really dig to find something to put on the report.

    • Jerry, REO stands for Real Estate Owned, also known as bank owned. I’m not sure what Dennis means by making money on the repairs. He probably requests a price reduction in lieu of the seller making the repairs. This can work but I don’t see the banks lowering their price much here in the Phoenix housing market. They don’t have to because of all the demand.

  5. Ok I gotta say it. It is not proper to caulk the base of the toliet. The wax ring is to seal the toliet to the drain. If the wax ring fails water will come out the bottom and you know to change the wax ring. If it is caulked, water is stuck and it rots the floor.

    I hope I missread that cause that is just sad. Regulation has its place but if competence needs to be there first or it just adds cost for no better and maybe even worse results.

    Good article though..

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