Below is a blog post by Michael Deery of California, who outlines the FHA limitations on properties that have been renovated and resold in a short period of time. This is great information for FHA buyers as well as those investors who fix and resell distressed properties. Please read carefully and be prepared if you are involved in FHA financing.
Buying and selling flipped properties can be a real pain in this market. For example, did you know that lenders require a 2nd appraisal on flipped properties where the seller is making more than 20% within 90 days and is selling to a FHA buyer, and the buyer is not allowed to pay for this 2nd appraisal? Last month over 26% of all homes purchased in California came from investors, 31% were all cash buyers, and the median price paid by these investors was $198k. These are the homes that are being flipped and sold to first time buyers usually within a 90 period. As most first time buyers are using FHA financing, understanding the rules that are in place to get FHA financing on flipped properties is essential for success in today’s market place. Here are 5 important rules to follow that will ensure these transactions will close.
FHA Flip Rule Update
First of all here is an update about flipped financing from the FHA. Just recently the FHA announced that they do allow financing on flipped properties within 90 days of resale as long as certain requirements are met. But NOT all FHA lenders are offering financing on flipped properties within 90 days, as some of them are choosing not to fund this type of transaction. As there are only a few lenders that allow financing when the seller has both a net profit of OVER 20% and the property is being resold within 90 days, very strict rules are in place.
We have been funding quite a few of these flipped transactions over the past few months, so here are 5 of the most important rules you need to know to ensure the transaction will close.
5 Important Flip Rules to Follow to Ensure closings
* These rules apply to a property that is being resold within 90 days and there is more than a 20% profit to the seller. *Not all of these rules apply to a flipped property that is being resold that is more than 90 days old.
1. A 2nd Appraisal is required if more than 20% profit
Almost all the lenders I know that are offering FHA financing on flipped properties are requiring a 2nd appraisal if there is more than 20% profit to the seller within 90 days of purchasing the property. The appraisal must clearly address the completed repairs and/or renovation to substantiate the increased value. Also very important, the FHA does not allow the buyer to pay for the 2nd appraisal, yes someone else must pay for the 2nd appraisal fee! So make sure to get this addressed upfront who will pay for this 2nd appraisal fee.
2. A home inspection is required on all flips
A home inspection is required on all flips by the lenders. The inspector must have no interest in the property or relationship with the seller, and must not receive compensation for the inspection for any party other than the borrower. Usually any and all repairs that are listed on the inspection report will be called out by the underwriter to be fixed by the seller. Remember on FHA financing the buyer is not allowed to pay for any repairs, so if there are going to be repairs needed, make sure these are addressed with the seller ahead of time so there are no last minute surprises at funding.
3. Health & Safety repairs
Any health and safety repairs noted on the inspection reportt, not already called for by the appraisers, will be required to be repaired as a “concurrent with funding” condition, documented with a CIR to include photos.
4. All transactions must be arms-length
All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction. For example, some lenders do not allow the escrow company to be affiliated with the buyer or the seller as this is an identity of interest, otherwise a new escrow will have to be opened up during the transaction. Many times the investor who is selling the property will have an escrow company too, this is not allowed by some lenders, so make sure this is checked up front if there is an affiliation with any two parties on the transaction.
5. A minimum 12-month chain of title is required
A minimum 12-month chain of title will be required on the preliminary title report to determine no pattern of previous flipping activity exists for the subject. If the property has been flipped twice in the past 12 months, it will not qualify for FHA financing.
I hope you found some of these tips above helpful. If you have any questions about a FHA flipped property scenario please do not hesitate to contact me directly at 858-200-9602, also for more important timely lender updates like this above, you can join my facebook page at www.facebook.com/FreeResourcesForRealEstateAgents.com I look forward to chatting soon.
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Kathryn Acciari, Brand Ambassador
Century 21 Real Estate LLC
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