Selling flips to FHA buyers - I learned a big lesson today!

13 Replies

I just finished my first flip and learned an important lesson - there are some restrictions for FHA buyers purchasing flips where the investor purchased the property

I had an accepted offer from an FHA buyer. Everything was smooth and on track, until the buyers mortgage broker heard from underwriting that properties originally purchased within 90 days aren't eligible for FHA loans. FHA loans can work for buyers purchasing properties last purchased 91-180 days ago, but it looks like it requires a second appraisal.

The FHA guideline is below if you are interested.

Lesson learned! I hope sharing this helps others who didn't know this.

Dan

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If a property is re-sold 90 days or fewer following the date of acquisition by the seller, the property is not eligible for a mortgage insured by FHA. FHA defines the 1 seller’s date of acquisition as the date of settlement on the seller’s purchase of that property, and 2 resale date as the date of execution of the sales contract by a buyer intending to finance the property with an FHA-insured loan. This home was sold 2/27<x-apple-data-detectors://0> and PA date of our transaction is 5/14, that is less than 90 days. In turn, this does not meet FHA’s flipping guidelines. Note - as a general rule fha financing should never be allowed, offered, or accepted as a financing option on a home that has been flipped until after 180 days has past since prior purchase. The rules for homes sold 90 - 180 days post previous sale are not much better. 4155.2 4.7.f Second Appraisal Required on Properties Sold Between 91 and 180 Days After Acquisition A lender must obtain a second appraisal by another appraiser if 1 the resale date of a property is between 91 and 180 days following the acquisition of the property by the seller, and 2 the resale price is 100% or more over the price paid by the seller when the property was acquired. FHA reserves the right to revise the resale percentage level at which this second appraisal is required by publishing a notice in the Federal Register. Example: If a property is re-sold for $80,000 within six months of the seller’s acquisition of that property for $40,000, the lender must obtain a second independent appraisal supporting the $80,000 sales price. Even if the lender provides documentation showing the cost and extent of rehabilitation that went into the property resulting in the increased value, the second appraisal is still required. Note: The cost of the second appraisal may not be charged to the borrower. 4155.2 4.7.g Resales Occurring Between 91 Days and 12 Months Following Acquisition FHA reserves the right to require additional documentation from a lender to support the resale value of a property if 1 the resale date is more than 90 days after the date of acquisition by the seller, but before the end of the twelfth month following the date of acquisition, and 2 the resale price is 5% or greater than the lowest sale price of the property during the preceding 12 months. At FHA’s discretion, such documentation may include, but is not limited to, an appraisal from another appraiser.

@Dan K 

This is accurate and hopefully the buyer didn't have to wait too long before finding this out.  

This is a very important lesson for rehabs that think they will be able to do a fix and flip within 30 to 90 days and then be able to sell their house to just anyone because lenders require seasoning and in the case of FHA that can be between 180 days to 1 year and as you have discovered you cannot have the buyer pay for the appraisal. Banks will not typically lend on a property without having an appraisal done anyway that I know of.

I have never run into this case myself because all the rehabs and remodels I have ever done have always taken from 6 months to over one year. This is very useful to know because I was starting to look at rehabs that required very little work and thought I could just turn around and sell them quick.

Thanks for the tip.

Originally posted by @Shaun Weekes :

@Dan K 

This is accurate and hopefully the buyer didn't have to wait too long before finding this out.  

 Shaun, the buyer only found this out 9 days before closing... a solid 4 weeks into the process  They are scrambling now to find a conventional mortgage. I hope it works out - but worry that it won't. 

You may suggest that they go to a portfolio lender. Likely they won't be able to secure a Fannie or Freddie in that time line. Good luck!

@Dan K.

Unfortunately, this is not just a FHA rule but even if the buyer is getting a conventional loan. The underwriter might ask for receipts and documents to justify the increase in value after a flip within 12 months. And/or ask for a second re-appraisal which mostly the seller has to pay.

You have to weigh in after the 2nd independent appraisal if it comes in lower whether to it's worth to you to sell, rent it for a year.  

Either way, it's NOT the end of the world but only part of real estate venture as it's summed up in Green Day's song "Good Riddance":

Another turning point, a fork stuck in the road
Time grabs you by the wrist, directs you where to go
So make the best of this test and don't ask why
It's not a question but a lesson learned in time

It's something unpredictable but in the end is right
I hope you had the time of your life

So take the photographs and still frames in your mind
Hang it on a shelf in good health and good time
Tattoos of memories and dead skin on trial
For what it's worth, it was worth all the while

It's something unpredictable but in the end is right
I hope you had the time of your life

It's something unpredictable but in the end is right
I hope you had the time of your life

It's something unpredictable but in the end is right
I hope you had the time of your life

--------------

Good luck

@Dan K.

Thanks Dan for the insight, I was unaware and currently looking for my first flip. I will keep this in might with rehab time and turn around time. Great information and I'm glad I jumped on the site this morning to see this post! 

Thanks,

Peter 

sorry im really new to all of this and don't what to ask a stupid question but here we go:

so basically if I do a flip I should wait around 6 months to sell it? more accurate I guess 180 days so in my mind im thinking, how long does it take to close the deal? can you begin closing a deal before the 180 days but actually close it just right or after 180 days? 

sorry if this is a dumb question just trying to figure out the options in this 

In a situation like this, would a rent to own be an option to consider? Give the location a year to mature and still allow the couple into the property. Unless you are needing the payout to move on to the next property. But if it isn't sold you are still paying on the loans that are due at least by renting you are getting something out of it. What other options might there be to get around the 90 day rule? I guess I shouldn't say get around, but that allow you work with potential buyers.

This is such common knwledge, it's ridiculous the mortgage broker didn't check this from the get go.  I'm guessing there were no agents involved, as both of them  should have known this also.  Fannie/Freddie do Not have this restriction.

@Dan K.

Also remember that an appraisal with an FHA loan lasts for six months, so if you are not completely sure that your asking price is what you want, the price will stay with the property for the six months.

Originally posted by @Wayne Brooks :

This is such common knwledge, it's ridiculous the mortgage broker didn't check this from the get go.  I'm guessing there were no agents involved, as both of them  should have known this also.  Fannie/Freddie do Not have this restriction.


The buyers mortgage broker and agent both missed this.  And, the mortgage broker didn't catch this for a solid four (almost five) weeks - and just over a week before our scheduled close.  It's definitely on my radar for future flips!

Some above suggest just holding longer. If you want to be a successful flipper that is not a good plan. Getting the best returns require that you turn your inventory quickly - just like a grocery store. The faster you can turn property the more profitable - AND COMPETITIVE - you can be in the market.

On this particular issue, I recommend a few things:

1. Find an awesome local lender that knows these rules inside out, and who has access to alternative sources that can fund. It isn't the buyers job to know, it's yours.

2. Encourage the buyer and buyers agent to use your lender. Have this conversation before accepting their offer. You either want them to use your lender, or know for sure their lender has the ability to get it done.

3. Clearly state in the listing that FHA financing is not available for this property. You might even consider suggesting that buyers should either make a cash offer or contact your lender for alternatives.

4. Finally, I usually require buyers to use my escrow company. They can also help catch these things.

@Dan K. - Any update?

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