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   ARTICLE   |   From Scotsman Guide Residential Edition   |   April 2010

FHA Tweaks Rule for Flipped Properties

Waiver of 90-day waiting period comes with concerns and opportunity

This past February, the Federal Housing Administration (FHA) enacted a temporary waiver of some of its policies regarding property resales. The change ( represents part of the U.S. Department of Housing and Urban Development's (HUD's) response to the national foreclosure crisis and joins the Neighborhood Stabilization Program to help spur economic development in suffering communities.

The temporary waiver permits borrowers to use FHA-backed financing for purchasing properties that sellers had acquired within the previous 90 days; previously, the 90-day waiting period was in effect. The one-year waiver took effect Feb. 1, and FHA has said it would monitor its effects and change its implementation period as necessary.

Mortgage brokers can now seek FHA financing for borrowers who want to buy recently renovated properties. With the waiver, FHA intends to foster quick property turnarounds that can help troubled neighborhoods by stabilizing home values and accelerating the sale of vacant properties.

Before the waiver, many possible homebuyers found themselves shut out from purchasing some of the best values on the market. The change pertains to HUD- and bank-owned homes as well as to properties sold through private sales. It should particularly help first-time homebuyers, according to FHA Commissioner David H. Stevens.

In addition to understanding the effects of the change, brokers should be fully aware of restrictions.

  • All transactions must be at arm's length. In other words, there can be no "identity of interest" between buyers and sellers or others involved in the transaction.
  • No previous history of flipping activity may be associated with the property.
  • There must be evidence of fair and open marketing.
  • The resale price generally should be no more than 20 percent greater than the prior purchase price, though exceptions exist.

The waiver does not apply to reverse mortgages or home-equity lines of credit.

The FHA has struggled with property-flipping for years, and many investors likely will rush to take advantage of the large housing inventory currently on the market and the new relaxed guidelines. Brokers should work diligently to promote the best underwriting quality for all clients using FHA-insured loans to purchase flipped properties.

Because of recently enacted guidelines ensuring appraiser independence, FHA officials may feel more secure about avoiding wide-spread fraud, even with rapid resales. Still, many investors will look to increase resale prices as much as possible, and the 20-percent limit may cause some to continue to be reluctant to work with FHA-insured buyers.

Brokers, meanwhile, should do what they can to guard against putting weak buyers in overpriced homes, especially those in which larger problems lurk beneath cosmetic repairs. If investors take a leading role in guiding potential buyers, brokers should be aware of potential predatory practices. Brokers can help combat such things by asking for a detailed list of repairs and their associated costs.

In addition, independent home inspections can identify problems and save potential buyers huge headaches later. They also can protect brokers and lenders in case of default later. Home inspections may represent the best shield against predatory practices for brokers and their clients.

Any evidence of unusual seller influence over buyers warrants recording, as well. In many ways, brokers' primary role when dealing with flipped properties is to protect buyers, lenders and themselves from predatory transactions.


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