Investing is so 2012: FHA Continues to Waive Restrictions on Flipping

“Flipping” has earned a bit of a bad reputation since issues with the housing market started a few years ago. The Federal Housing Authority agreed with the iffy nature of flipping and instituted an anti-flipping measure in 2003 that “was initially put in place to prevent predatory flipping, in which homes are quickly resold at inflated prices to unsuspecting borrowers.” This measure disallowed FHA lending to any homeowner who owned a home for less than 90 days (see article).

With the intention of spurring investor purchases of foreclosed homes once again, this measure was suspended in 2010 and was originally to expire this month. However, given the continuing issues with the market, the FHA has extended the waiver. Foreclosed homes lead not only to deferred maintenance of a home, which can be costly and can make resale of the home that much more difficult, but they can also lead to greater crime rates as people strip wires and steal plumbing, appliances and other elements of the home; squatting and other undesirable effects are also a side effect within the neighborhood in which they exist.

As the FHA eases up on so-called “flipping,” many are looking to rehab the term itself. The FHA defines “flipping” as:

“Property ‘‘flipping’’ refers to the practice whereby a property recently acquired is resold for a considerable profit with an artificially inflated value, often the result of a lender’s collusion with the appraiser. Most property flipping occurs within a matter of days after acquisition, and usually with only minor cosmetic improvements, if any. In an effort to preclude this predatory lending practice with respect to mortgages insured by FHA, HUD issued a final rule on May 1, 2003 (68 FR23370) that provides in 24 CFR 203.37a that FHA will not insure a mortgage if the contract of sale for the purchase of the property that is the subject of the mortgage is executed within 90 days of the prior acquisition by the seller and the seller does not come under any of the exemptions to this 90-day period that are specified in § 203.37a(c).”

However, in defense of what they consider solid investments, many who would be deemed flippers want us to know that, “For real estate investors, the term ‘flipping’ simply means buying and selling quickly. There is no connotation of fraud just because a home is bought and sold in a short period of time” (see article). The same investors will tell you that, “Limiting investor profits on the resale of a home with documented, legitimate renovations [such as the FHA did in 2003] shows a lack of understanding of the financial issues involved in buying and renovating houses.”

A controversial issue, flipping can be argued on either side. But for now, the FHA is recognizing that – squeamish as they may be about it – flipping may be just one of many necessary solutions to the current housing issue.

Author: kimhuntkw

We specialize in Real Estate in the Pleasanton, Dublin and Livermore areas of the East Bay in California

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