FHA Waives 90 Day Flip Restriction

This is Big News for investors AND a smart move by FHA.  Effective February 10, 2010 under waiver of 24 CFR 203.37a(b)(2) the previous restriction preventing FHA buyers from buying a property with less than 90 days title seasoning has been waived for one year as follows:

            The waiver will take effect on February 1, 2010 and is effective for one year, unless otherwise extended or withdrawn by the FHA Commissioner.

Some conditions apply.  Those most relevant to investors are as follows:

-          All transactions must be arms length

-          The Seller holds title to the property

-          The waiver does not apply to Home Equity Conversion Mortgage (HECM) for Purchase program

-          No pattern exists of flipping the subject property within 12 months 

-          The property was marketed openly and fairly via MLS, Auction, or FSBO

IMPORTANT NOTE: the waiver states (any sales contracts that refer to an “assignment of contract for sale”, which represents a special arrangement between seller and buyer may be a red flag)

-  If the sale is 20% or more above the acquisition cost additional lender requirements are to apply as follows:

o       Justify the increase with documentation of significant renovation to justify the increase OR a second appraisal, AND

o       The lender orders an FHA approved inspection report and provides it to the Buyer

The waiver and the balance of specific language can be found at:

http://www.hud.gov/offices/hsg/sfh/waivpropflip2010.pdf

The Red Flag language regarding “assignment of contract for sale” is an important consideration for investors flipping properties.  Transactions involving an assignment are likely to receive extra scrutiny by the End-Buyer mortgage underwriters.  However, use of Transactional Funding is a low-cost alternative by providing two stand-alone transactions allowing for the flip in less than ninety days.  Additionally, the requirements to justify any sale price above 20% of acquisition cost are likely to receive scrutiny.  However, at least the waive allows for it with documented improvements and/or a second appraisal and an inspection.

I applaud FHA!  The waiver is not intended to assist investors, but is a realization that not restricting free market activities will help move REO property more quickly, will maximize the return to FHA, will assist first time buyers and will help stabilize real estate prices.  How long will it take FNMA and Freddie Mac to see the light?