ATTENTION:
THIS POST HAS 2010 UPDATES
SEE THE LATEST:
FHA has updated their flipping rule and their website (see bottom of this email for link and the exact and complete verbiage from the FHA website).
- The old flipping rule was that the property could not be flipped by a rehabber sooner than 90-days after the first purchase was recorded. (not the actual purchase date)
- The new rule now states that it is the acquisition date is the date of settlement (purchase date).
However, the old rule does still stand that the re-sale date is still the date of execution of the sales contract. So you can’t go under contract until the 91st date (don’t start counting until the day after the original date of purchase).
So here’s the problem. If I buy a property and rehab it in 30 days and put it on the market – I have to wait 60 more days to sell to an FHA buyer – which happens to be the predominate buyer out there right now.
Here’s a possible solution that many investors have been using:
1. Go under contract but in the additional provisions put in “This contract is to be replaced and superseded by a new contract dated ??/??/????” (at least 91 days after original purchase date). This will ensure that the buyer and seller are both protected in the interim.
2. I highly recommend that you have the inspection done immediately, so it isn’t off the market too long if an inspection resolution can’t be reached between the lender and buyer. Once any inspection issues have been resolved, you can simply put “completed” for the inspection objection and resolution deadlines on the new contract.
3. Find a lender and title company who is willing to do a lot of the preliminary time consuming processes prior to the 91st date. NOTHING submitted to the lender should be dated prior to that 91st day – contract, earnest money, disclosures – NOTHING!
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The link and exact verbiage from HUD/FHA handbook is provided below:
http://www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-2.4.7.e
4.7.ee. Restriction on Re- Sales Occurring 90 Days or Less After Acquisition
If a property is re-sold 90 days or fewer following the date of acquisition by the seller, the property is not eligible for a mortgage insured by FHA.
FHA defines the
- seller’s date of acquisition as the date of settlement on the seller’s purchase of that property, and
- re-sale date as the date of execution of the sales contract by a buyer intending to finance the property with an FHA-insured loan.
Reference: For exceptions to this 90-day restriction, see HUD 4155.2 4.7.h
Other post that may interest you as a property flipper:
How to Get Fast Mortgage Approval and Best Rate
{ 4 comments… read them below or add one }
I have just run into this situation for the first time. I am looking for a viable solution and yet am very concerned about the suggestion of writing a contract, not submitting to lender, and then replacing the contract – isn’t that fraudulent?
Our buyers are considering doing a lease option with specific purchase terms and a non-refundable deposit (after getting pre-approved and completing inspections). We are still concerned about the appraisals 90 days from now in our declining market.
Thank you for starting this conversation!
Caron – I don’t think it would be considered fraudulent to have a contract during the seasoning period to make both parties feel comfortable being “locked,” and then canceling that contract for a new one on day 91. The point of the first contract is to get started with all due diligence other than the loan (inspection, insurance, title, etc). By the time the second contract is executed these contingencies should all be finalized. It’s not a perfect scenario, but the best we can do for clients under the current rules.
Seasoning issues can easily be overcome by using an Option Contract, Co-created by Jeff Walker, a practicing attorney in Ohio as well as a real estate investor. My company has used this contract for back to back closings, without an issue.
Thanks for the input Stacie. I have had some success using option contracts as well, but only with certain sellers (obviously not banks or asset managers). Some investors are also using “reverse assignments” to adapt to new rules. We have found the best strategy for the most common flip scenarios is to use approved real estate contracts and fund Side A closing with transactional funding. Happy investing.