There is good news from the Federal Housing Administration (“FHA”) for real estate investors. Late last month Commissioner David H. Stevens extended FHA’s temporary waiver of the agency’s “anti-flipping rule.”
Flipping is the practice of selling a home in a relatively short time after its acquisition. The FHA defines a “flip” to be ownership by the seller of less than 90 days, and the “anti-flipping rule” prohibits the issuance of an FHA insured mortgage on a home owned by the seller for less than that time period. The FHA regulations are an attempt to prevent predatory “flipping” practices – where a property is quickly resold at inflated (and unjustified) prices to an unsuspecting borrower.
But due to our market, more than predatory sellers have been affected by the “anti-flipping rule”. Lenders and the investors who have acquired the thousands of properties as a result of foreclosures are also subject to the Rule.
The “anti-flipping” rule could act as a significant impediment to resales by those sellers. This is because FHA-insured mortgage financing is often the only means of financing available to potential home buyers. In markets such as the Phoenix metropolitan area, where the majority of sellers are either lenders or investors who have bought from lenders (and sometimes overwhelmingly so), it is inevitable that resales are being unnecessarily delayed. So the waiver will help to move more foreclosed properties off the market and reduce the number of vacant homes.
The legitimate investor buyer, that acquires a home intending to make renovations or other improvements with the intent to sell it for more, has always been negatively impacted by the “anti-flipping rule”. This is because the longer a home is held, the more expensive it is to the investor, so the shortest possible holding time is a prime investor goal. FHA has determined that prohibiting the use of an FHA mortgage on a subsequent resale within 90 days of acquisition is adversely impacting the willingness of investors to purchase homes from lenders, because they must consider holding costs and the risk of vandalism associated with allowing a property to sit vacant until the 90 days has expired.
Therefore, waiver of the 90-day lock-out period will allow all sellers to resell homes quicker. FHA believes that this will stabilize real estate prices, revitalizing neighborhoods and communities, and will accelerate the resale of foreclosed upon homes in those neighborhoods that are struggling to overcome property abandonment and blight.
To investors, the removal of the “anti-flipping rule” and the ability to sell homes to FHA borrowers without delay is a major advantage. However the waiver lasts only through the remainder of 2011, and it can be withdrawn at any time by the FHA. So if you intend on purchasing a property as an investment, do it sooner rather than later to ensure your sale to buyers that use FHA-insured financing will not be delayed.
Details of this temporary policy and other specific conditions are available on HUD’s website here.