There are sooooo many reasons why it is important to select an educated real estate broker and lender – the process of buying & selling has become more and more cumbersome. Educated is a key word because to be quite frank several real estate brokers & lenders don’t know the rules. This can make your experience go from a five star rating down to a one star.
With our market getting hotter, flipping properties is back on the scene. A lot has changed over the last few years & I thought this post was a great summary of things to look out for when buying a home that has been “flipped”. It also affects sellers as their profit margin may be compromised. Flipping is essentially an investor purchasing a property below market value, typically renovating it and then selling the home on the open market for a profit once complete.
This lender, Kevin Martini did a great job summarizing all the changes & thought I would pass along:
Buying & Selling flipped properties can be challenging in this market depending on the financing the Buyer if trying to get.
Conventional financing does NOT have an anti flip policy, but many lenders still apply their own rules.
Now FHA has a set of strict rules for financing flipped properties if the Seller is making more than 20% profit within 90 days of resale. Therefore, understanding the different financing rules that are in place today for Buyers and Sellers & flipped properties, is essential for success in today’s marketplace.Conventional Guidelines for Financing Flipped Properties
What many people do not know, is that conventional financing does not have an anti Flip policy, so there is no limit on the amount a profit a seller can make in any given amount of time when reselling a home.
What Buyers and Sellers needs to look out for, is lenders may apply their own set of “overlays”, which are rules a lender will apply on top of regular conventional underwriting guidelines to minimize their risk on the transaction. For example, there are some lenders who will ask for two appraisals, if the profit to the seller is more than 20% in less than 90 days for example.
Another issue that comes into play, is when a buyer needs to get financing over 80%, because now the Buyer has to qualify for private mortgage insurance (PMI). When mortgage insurance companies have to get get involved in the transaction, they may want to see more documentation to justify the appreciation on the property, so be prepared to document the value increase thoroughly with supporting documentation, or once again, a particular lender may ask for a second appraisal.
FHA Guidelines for Financing Flipped Properties
The FHA is definitely the program with the strictest rules. NOTE: The following rules apply to a property that is being resold within 90 days & there is more than a 20% profit to the seller.
*Not all of these rules apply to a flipped property that is being resoldafter 90 days.
1. 2nd Appraisal is required if > 20% profit within 90 days
The FHA requires a 2nd appraisal if there is more than 20% profit to the seller within 90 days of purchasing the property. The appraisal must clearly address the completed repairs and/or renovation to substantiate the increased value. The FHA does not allow the Buyer to pay for the 2nd appraisal.
2. A home inspection is required on all flips
A home inspection is required on all flips by the FHA. The inspector must have no interest in the property or relationship with the seller, and must not receive compensation for the inspection for any party other than the borrower. Usually any and all repairs that are listed on the inspection report will be called out by the underwriter to be fixed by the Seller.
3. Health & Safety repairs must be completed
Any health and safety repairs noted on the inspection report, not already called for by the appraiser, will be required to be repaired by funding,which means the appraiser will have to go back out to the property and take pictures or the repairs.
4. All transactions must be arms-length
All FHA flipped transactions must be arms-length, with no identity of interest between the Buyer and Seller or other parties participating in the sales transaction.
There are some lenders who do not allow the escrow company to be affiliated with the seller as this is an identity of interest. For example, sometimes the seller or the REO company who is selling the property will have an escrow company too, so this is not allowed by FHA lenders, so make sure this is checked up front if there is an affiliation with any two parties on the transaction.
5. A minimum 12-month chain of title is required
A minimum 12-month chain of title will be required on the preliminary title report to determine no pattern of previous flipping activity exists for the subject. If the property has been flipped twice in the past 12 months, it will not qualify for FHA financing.
Address All Concerns Upfront on a Property
A good idea is to address any concerns upfront on all flipped properties. A good rule of thumb for agents and buyers is to check the purchase date when the seller bought the property, as this will determine many of the rules above.
If the property is being resold within 90 days, this is usually where additional rules may apply, so make sure to ask the right questions.