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New FHA House Flipping Laws

Posted by James DeLoney on Friday, February 18th, 2011 at 3:59pm.

So you decide to take the plunge into real estate investing in Austin.  You decide against using an agent, because you think it will improve your bottom line.  Who needs an experienced agent when you have resources like Zillow and Trulia, right?  You spend 100s of hours researching the market and find the perfect distressed property in Austin with awesome potential for a big return on investment.

You close on the deal, and upon remembering that a successful investor once told you that make your money on the buy side, you smile at your results. 

You perfectly execute your remodeling plan, stay on budget, and even complete the remodel ahead of schedule.  You’ve hit a homerun you’re first time at bat. 

You decide to enlist the services of a local real estate pro to help you market your property, and it’s then that you hear the question that stops your heart.  

Upon your first meeting, the local agent asks, “Are you familiar with the new federal laws regulating house flipping?” 

You’re response is, “cough…gasp…What?”

The agent explains that as a result of the financial meltdown, the Housing and Urban Development department has passed FHA house flipping rules to protect homeowners and themselves from losing money. You can see the rule in a document called Prohibition of Property Flipping in HUD's Single Family Mortgage Insurance Programs; Final Rule; 24 CFR Part 203, Doc. No. FR-4615-F-02.

As the lights begin to dim and the room begins spinning, you collect yourself before passing out. You ask the agent, “So what does this mean for me?” 

The agent explains that it all depends on how quickly you have flipped the property.  He explains that the worst case scenario is that you flipped the property in less than 90 days.  In that case, the property will not be eligible for FHA financing until you have met certain ‘seasoning” requirements. 

“I flipped the home in 60 days.  Is that going to be a problem?”

The agent informs you that the majority of buyers in the price range in which your home will be marketed will need FHA financing to qualify.  That’s when you ask yourself, “If only I had talked to this agent before making the purchase?” 

Here is a quick summary of the rules.   

Property sold within 90 days purchase won't be able to get financing with FHA mortgages using HUD insurance. Those selling a property within 91 and 180 days of purchase must record the resale value if it's selling for more than the last purchase price. If the property is selling within 91 days and 12 months of purchase, HUD may require additional documentation of the home's market value.With these new rules from the FHA you'll have some trouble getting buyers for your house flip. It basically means that you'll need to find buyers for your house flips that aren't using FHA backed loans. These rules are also commonly referred to as 'seasoning issues'. You'd have to hold the property for at least three months, or let it season before you could sell it to a buyer with financing of this type.

There are only three exceptions to these rules. They are:

1. Selling corporate housing purchased during the relocation of an employee
2. Selling HUD owned real estate property
3. Selling a newly build house
These exceptions don't typically apply to real estate house flipping, except maybe the HUD owned property. However, there are lots of other buyers using more conventional loans to purchase property.

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