Real estate investing has long been a way for creating wealth. There are even television shows and channels devoted to buying and improving properties. The two primary ways to invest in real estate include a buy then hold rental property strategy and then a property flipping strategy. A property flip is when a real estate investor buys a property, may or may not renovate it, and then sell for a profit. Rather than a buy and hold strategy, flipping is selling quickly for a profit. Nothing wrong with this type of business as long as it doesn’t involve fraudulent behavior. But when an investor sells a home, be aware of the FHA 90 day flip rule!
If you are a Realtor, real estate investor, mortgage lender, or even a buyer considering a recently rehabbed or flipped property, know this rule!
FHA 90 Day Flip Rule
FHA is a very popular home loan product, so investors need to pay attention to its flipping restrictions. Often sellers are not aware of these important guidelines. Unfortunately, the first time a seller learns of these rules, it is usually a little too late. Typically, the seller learns after executing the purchase contract. As mentioned above, flipping properties can be perfectly legal. Although, FHA has concerns about this particular area because fraudulent activity frequently sneaks into the transaction. To combat flipping fraud, the Department of Housing and Urban Development created the FHA flipping rules which are divided into two groups.
- Less than 90 day ownership
- 91 – 180 day ownership
Each time frame has its own rules and the FHA 90 day flip rule is inflexible. So, if you’re a Realtor, real estate investor, or a buyer purchasing a flip, read on!
FHA Flipping Red Flags
Lending agencies always look for areas of potential fraud. Even though most transactions are perfectly legal, it must be checked. A few of the areas that raise awareness to a possible issue with a flip would be…
- Dramatic increase in price
- None or minimal improvements completed
- Using same vendors for all transactions
- Straw buyers
A quick resale for a substantial profit with little to no improvements is a reason for concern. It may end up being perfectly legal, but it will always get checked out. Also, if the same vendors are always used, it could be a possible scheme to defraud lenders. Finally, FHA performs post closing audits to ensure these areas as well as making sure there was no straw buyer. A straw buyer is one that represents living in the property, but really purchases the home with no intention of living in it.
Again, nothing wrong with buying and selling real estate. As long as it is done on the up and up. If not sure or have questions, contact us.
FHA 90 Day Flip Rule Defined
This is the most restrictive of the two date ranges. If a property is considered a 90 day flip, FHA will not finance the property. Also, the FHA flip waiver rule expired in 2014. So, these rules must be followed in an investor flip situation.
How do I figure the 90 days? Start with the date the seller acquisition date, which means the date of the deed recording. Next, look at the new purchase contract date. Finally, count the days in between. In order to use an FHA loan, it must be a difference of 91 or more days. Although, there are certain transactions where the FHA 90 day flip rule does not apply. These are listed later.
91 – 180 Days Flipping Rule
OK, maybe it is past the 90 days. Well, there’s another rule after that. The good thing is that at least FHA will lend on the property during this period. But, there is a possible second appraisal required. Another appraisal is required if:
- The resale is between 91 – 180 days AND
- New purchase price is 100% or more ** over the price paid by the seller OR
- A higher priced loan (HPML) and the purchase price is more than 20% over the seller’s acquisition price
If the above applies, the FHA lender must order both appraisals.
** 100% over the price means doubling the initial price. Here’s an example. If seller paid $100,000 and the new price is $200,000, the second appraisal is required. Determining if the third rule applies, an FHA lender can only determine this.
FHA Flip Rule Second Appraisal Requirements
- Performed from different appraiser
- Buyer may not pay for second appraiser
- Must include documentation to support increased value
- A lower value is used if the second appraisal is 5% lower than the first appraisal
- The lender must obtain a 12 month chain of title documentation resales
Additionally, FHA may require more documentation like another appraisal if the sale date is between 91 – 365 days and the resale price is 5% or greater than the lowest sale price of the property within prior 12 months. Rare but could happen.
FHA 90 Day Flipping Rule Exceptions
Not all quick sales are flips and FHA realizes this. So, the FHA flipping rule does not apply to the following transaction types.
- Properties acquired by an employer or relocation agency in connection with the relocation of an employee;
- Resales by HUD under its real estate owned (REO) program;
- Sales by other U.S. government agencies of Single Family Properties pursuant to programs operated by these agencies;
- Sales of properties by nonprofits approved to purchase HUD-owned Single Family properties at a discount with resale restrictions;
- Sale of properties acquired by the seller by inheritance;
- Sales of properties by state and federally-chartered financial institutions and Government-Sponsored Enterprises (GSE);
- Sales of properties by local and state government agencies; and
- Sale of properties within Presidentially Declared Major Disaster Areas (PDMDA), only upon issuance of a notice of an exception from HUD.
- The restrictions listed above and those in 24 CFR 203.37a do not apply to a builder selling a newly built house or building a house for a borrower planning to use FHA-insured financing.
Above exceptions list obtained from FHA’s flipping regulation 24 CFR 203.37.
Need to Buy or Sale in Less Than 90 Days?
There are other lending options besides FHA and other programs do not have this rule. Although, keep in mind that lenders always look for fraudulent activity. Plus, any property flip will ensure that the underwriter will closely review the appraisal. Looking for other lending solutions? Give us a call!