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
“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.
My 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.