If you’re involved in flipping houses, you probably have first hand knowledge of this rule. If you’re wanting to get involved in flipping houses, you should know about this deal.
FHA requires that:
- only owners of record may sell properties that will be financed using FHA-insured mortgages;
- any resale of a property may not occur 90 or fewer days from the last sale to be eligible for FHA financing; and
- that for resales that occur between 91 and 180 days where the new sales price exceeds the previous sales price by 100 percent or more, FHA will require additional documentation validating the property’s value. FHA also has flexibility to examine and require additional evidence of appraised value when properties are re-sold within 12 months.
In the boomtime the Federal Housing Administration noticed a lot of fraud involving owners that would buy a house and sell it, almost instantly, for a large profit. More often then not they inflated the resale price by selling it to friends, family, etc and sharing the cash profit.
Fast-forward to todays market and this really ties our hands. There is a glutt of properties on the market that need 10, 20 or 30 thousand dollars of repairs and can be found at a huge bragain. But there is a very limited supply of inventory that is turnkey and move-in ready. For right now, the only solution we have come up with is sit back and hold the property for 90 days.
Why not just find a conventional buyer?
House #1 actually did go to a conventional buyer. Keep in mind, most buyers with large down payments got their down payment from selling their previous house and moving. Since all the equity has been eroded the only buyers that are left seem to have very limited down payment funds.
Should FHA change the rule?
They did, but only for banks and non-profits. Some of my colleagues has brought this up with some of the FHA management and at this time they have no plans to re-evaluate the deal.
What does this mean?
When you are penciling out your repair budget you should factor in at least at minimum a 4-5 month hold-time.