In a move intended to help banks move REO (foreclosures) off their books faster, FHA will be lifting the 90-day seasoning requirement it instituted back in 2003 to combat predatory lending and flipping.
Real Estate Flippers Start Your Engines
The change will take effect on February 1, and will last for at least 12 months. You may remember we heard that FHA was lifting the seasoning requirement before, but that was a misunderstanding and didn’t help us. This time MAY be different, but there are caveats to the waiver (read the full details from the FHA) we should consider.
A Little Background on FHA Buyers and Real Estate Investors Working with Them
- 39% of recent buyers used FHA-insured loans (according to the latest data from the National Association of Realtors)
- 51% of first-time buyers used FHA-insured loans (according to the latest data from the National Association of Realtors)
- That’s a LOT of buyers… we want buyers…
- Buyers are choosing FHA for easier credit qualifications and lower downpayments (3.5%)
The 90-Day Seasoning Issue
- FHA imposed the 90-day seasoning back in 2003.
- They lifted the requirement in 2008, but ONLY for foreclosed properties, and NOT FOR US
- They have now announced (on January 15, 2010) that they will waive the seasoning on February 1, 2010, for 12 months, in an effort to help banks move REOs (foreclosures)
Flippers Beware… This Isn’t a Key to the Kingdom
Everybody is rejoicing, but WAIT, you may not be the intended recipient of the FHA’s goodwill. Here is an excerpt regarding the conditions under which the waiver applies:
To protect FHA borrowers against predatory practices of “flipping” where properties are quickly resold at inflated prices to unsuspecting borrowers, this waiver is limited to those sales meeting the following general conditions:
- All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.
- In cases in which the sales price of the property is 20 percent or more above the seller’s acquisition cost, the waiver will only apply if the lender meets specific conditions.
You may not be the intended recipient of the FHA’s goodwill.
Working backwards, the second condition isn’t a surprise. If there’s a big difference between what you paid and what you’re selling for, expect to have to justify it (keep your receipts!). I’ve had to do this with FHA and non-FHA buyers, and it’s never been a problem.
Then again, I’m a white-hat flipper… if you’re the kind they are hoping to avoid (“predatory flippers”), well… God love ya (cause I sure don’t!).
The first point, however, is where reading the full details (or just reading on) is in order. There are 4 subpoints to this first condition:
- The seller holds title to the property
- LLC’s, corporations, or trusts serving as sellers are operating in accordance with applicable state and federal law.
- No pattern of previous flipping activity exists for the subject property, as evidenced by multiple title transfers within a 12-month time frame (chain of title information for the subject property can be found in the appraisal report)
- The property was marketed openly and fairly, via MLS, auction, For Sale By Owner offering, or developer marketing (any sales contracts that refer to an “assignment of contract of sale,” which represents a special arrangement between seller and buyer may be a red flag)
So, you need to:
1. Hold title to the property
2. The property can’t have multiple title transfers in the last 12 months
3. Market the property
4. Be ready for trouble if your contract includes an assignment
If you can meet the standards (and many of us can with many of our properties), then prepare to have a much larger pool of buyers.
Looking at this news in the most positive light, investors are being recognized as a part of the solution finally, and the fact that we should be compensated for our services legitimized.
What do you think? Will this help your business?
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