With the real estate market making a comeback and investors getting back in the market, we are beginning to see more borrowers buying homes which have been purchased and renovated by investors and being put back on the market within a few months of being purchased. So – how does that affect the borrower and seller?
How do property flips affect the borrower and seller when put back on the market?
The answer depends in part on how long since the property was purchased by the seller and how much the value has increased. As many borrowers are using FHA loan programs to qualify for purchasing these homes, we will address those guidelines first.
FHA Anti-Flipping Rule
FHA refers to these as “property flips.” In 2003, FHA published the “anti-flipping rule.” Under this rule the FHA would not insure loans for properties that had been purchased within the last 90 days. In 2010, FHA suspended the rule for two years in an attempt to facilitate the sale of some of the excess homes on the market. The suspension was subsequently further extended through December 2014.
The current rule is generally as follows. If a property has been purchased within the last 90 days and is being resold at a 20% increase in value over the previous purchase, the lender will require that a second appraisal be performed. If the property has been purchased greater than 90 days but less than 180 days from the current sale and the value has increased by more than 100%, once again a second appraisal will be required by the lender.
The good news for the buyer is that FHA prohibits charging the buyer for the second appraisal, so it will typically be paid for by the seller. In addition the lender may request to see documentation of the work that went into the home to justify significant increases in value in such a short period of time.
The investor/seller would be wise to take pictures of the home before and after the renovation and maintain detailed records of expenditures made to improve the home. This will facilitate the loan process and provide further assurance to the underwriter that the value increase is justified.
The rule also requires that there is not a relationship or “identity of interest” between the buyer and seller of the property.
Property Flipping Rules for Conventional Mortgages
While these rules apply specifically to home being purchased with an FHA loan, there are also similar rules in effect for borrowers purchasing with a conventional mortgage. Under the conventional loan programs, the underwriter will also be concerned with evaluating any significant increases in value of a property that was recently purchased and may also require a second appraisal. These rules vary by lender and also allow for more underwriter discretion.
2015 Update: FHA Announces Expiration of the Property Flipping Waiver
For information about the expiration of the FHA Flipping Wavier, see our article: FHA Announces Expiration of the Property Flipping Waiver.