What you need to know when buying a flipped property.

10 10 2011

Here’s the HUD memo that details the extension on the waiver of anti-flipping regulations.  It gets pretty tricky and double-negative-y pretty quickly, so here’s the simplest way I explain it:

During the housing bubble days, when homes were increasing in value quickly, home flippers would buy homes, do minimal repairs (ie paint) and sell it quickly for a profit.  Some of these homes had major issues like mold that had been quickly painted over, or foundation issues that had been temporarily patched together.  Also, some of these transactions had fraudulent, selling a home for more than it was worth to a buyer who never intended to live there, and who received a cut of the money from the sale.

 So HUD looks very closely at any transactions where the seller bought the property less than 6 months before the new sale.  They are looking to make sure that the property is in good shape, that it is worth the sales price, and that the transaction isn’t fraudulent.  Here’s what that means to you:

 Normally HUD would not even allow any sales under 90 days after when the seller purchased the home.  The only exceptions were when the seller inherited the property, since this would not be a sale, or a typical investor buying and flipping properties.  HUD recently started allowing transactions under 90 days if the house and the transaction meet additional guidelines.  Even though HUD will allow this, not many investors will close transactions under 90 days.  Check with your lender if they will allow FHA closes under 90 days.  But here are HUD’s guidelines for closing an FHA loan during the 90 day period:

1. The transaction is arms-length: no business relationships between the seller, buyer, or other parties in the transaction.  The seller is on title to the property.  If an LLC or other company is involved in the transaction, it was already established before the transaction began and was operating according to applicable laws. 

2. The property’s value is accurate: It has not been bought and resold multiple times in the past 12 months.  It was marketed on the MLS.  If the value increased more than 20%, then you must document the value with the following:

    a.  Appraiser documents the improvements to the property and the reasons for the increase in value. (usually this will be copies of the repair receipts and invoices from the seller)

     b.  A home inspection.  Any health issues (mold, unsafe gas heaters, etc) or structural issues (foundations, roofs, etc) must be repaired and the repair must be documented by the home inspector or the appraiser.

Most lenders require a second appraisal to double-check the value and condition of the home.  The lower value of the two appraisals will be used and any repairs mentioned by the appraisers must be fixed and documented like on 2b.

The bottom line is that it CAN be done, to close a flipped property in under 90 days.  But you need an excellent, proactive lender who addresses these additional issues for buying a flipped property.  And I’d love to be that excellent, proactive lender for you.  As always, I’m here to serve you.

Wilhelm Koenig

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