FHA 90 Day Flip Rule

Many people are using FHA loans these days. The FHA offers low government backed rates but has the problem of high mortgage insurance payments. FHA however offers guidelines that help people who have tighter budgets because they allow otherwise well qualified borrowers to exceed the standard debt to income ratios if other compensating factors exist.

This market has brought many home flippers into the fold.The large quantity of foreclosures that followed the market crash led to an abundance of investors flipping homes. The FHA has a rule loosely called the "Flip Rule" that requires at least 90 days of ownership before the sales contract is written. I think this is a stupid rule. Most of the homes that investors buy are houses that are too rough to be financed. They buy them for all cash and then make the improvements and repairs to bring the home up to market value. The FHA doesn't like to see a rapid price increase out of character with the rest of the market.

Many of these home flippers are professional companies that do a great job. There are probably some hacks out there as well, but for the most part, these companies provide a service to the community by rehabilitating otherwise dilapidated houses. My experience has been mostly positive when confronting these sellers with repairs after a home inspection. They tend to fix all the reasonable problems on an inspection report. Traditional sellers are often obstinate regarding repairs.

I think the FHA needs to re-visit this rule. The FHA is a loan program specifically designed to help entry level buyers and families get into homes and these "flipper" properties are often ideally suited for them.

Buyers intending to use an FHA loan may find a flipped property. Be sure to have your Real Estate professional check the closing date and write the offer after 90 days has passed. Your local agent should be aware of the better home flipping companies that operate and offer some guidance in this area. There is a procedure for purchasing a house before the 90 days. The FHA requires two appraisals and some paperwork from the seller regarding the repairs/upgrades. Banks may have their own overlay requirements as well. Be sure to consult your trusted mortgage professional before making an offer on a home with a seller that has less than 90 days of ownership.

Resales suffer a little hit from new construction boom

The resale market for homes is still appreciating but the rapid rise of 2013 has slowed to a modest rise thus far in 2014. I believe that the sudden expansion of new construction all over the area has had a strong impact on resale listings.

That said the combined two year growth rate is at 18% and that spells good news for formally upside down homeowners looking to move.

The modest rate of growth will help homeowners but may start stinging that entry level buyer. Buyers earning less than $30,000 a year are starting to find it difficult to get into a single family detached house.

I have been blowing the warning siren for a couple of years now and it seems the the reality has caught up with the alarm.

First time home buyers sitting on the fence need to call their favorite Realtor and jump in now.

The news media may indicate a "slow down" but it is a slow down in the rate of growth, not a decline in values. Prices continue the march upward and this mean purchasing power is shrinking.

Happy hunting :)

Blast from the Past...

I am out of town today but this post from a year ago still holds true...

originally posted on 9/9/2013

Many banks are starting to use online auctions for the sales of REO (Real Estate Owned) This is the term commonly used to describe real estate that is owned by a bank, obtained in foreclosure. HUD has been doing auctions for years on its FHA inventory but their auctions are not run live. HUD auctions use sealed bids. REO managers have a different idea. They want to market the house in a classic Ebay style environment. They want to drive the price up as high as possible with a bidding frenzy. This can be a great way for REO sellers to sell, but can have pitfalls for buyers which I will discuss a bit later.

One of the real areas of concern I have is short sales. I see this movement towards online auctions with short sales. Many banks are having their debtors sign an auction agreement along with the other short sale documents. The house is then placed up for auction terms and often the auctioneer does not even notify the listing agent. It seems that banks are going to continue to push ethical boundaries on short sales and in some cases take advantage of the American people while cashing in on federal programs like HAFA (Home Affordable Foreclosure Alternatives).

I have had some positive experiences with one loan short sales under auction terms. It seems the first lien holder often pre-negotiates the deal with the auction house and the short sale can move ahead with efficiency. The problem is that there is sometimes a second lien and the auction house either fails to disclose to the buyer or discloses in a fashion that is difficult to find. This can cause allot of grief for the buyer and the home owner.

People that are bidding on these auction homes should have a real estate professional aid them in the process. Typically the homes are listed on the local MLS and your real estate agent will get paid by the listing broker under the terms of the listing agreement. By all means a buyer should always have representation in a transaction involving large amounts of money.

In general the auction houses appear to be decent business operators. The problem is that another party to the transaction is now involved. The more parties in a real estate transaction the more likely it is to fail. Buyers and sellers can be taken for a long and uncomfortable ride when there is two banks and auction house involved in the deal.

If a buyer decides to bid on an online real estate auction, they should consult their trusted local real estate professional. That agent can do some quick research to help the buyer decide whether or not the home is viable. The agent can also help determine a good bidding range. It is paramount to remember that auction terms are designed to get an emotional response by the bidders. The emotion that screams, "I want to win" so as to drive up the price. Some auctions even have disclosures that suggest overbidding will result in mandated payment even if the property does not appraise. This could be a problem for a buyer using a loan to purchase.

In my experience dealing with the short sale departments at most banks is akin to getting a root canal without Novocaine. So adding the auction element on these sales is surfing in dangerous seas. Caution is heavily advised.

Finally, there are some banks now taking their REO inventory directly to auction without listing on the local MLS. They hire a local licensed agent to make the sale legal under state law, but offer no representation for the buyer. I believe that American banks are already about as ethical as your average mugger, now they are trying to engage the direct home buying public in a "dark alley deal" that will almost certainly take advantage of the buyer. If the auction house is listing a property that is not listed on the local MLS, I would tell most buyers to run away. Seasoned investors may feel compelled to bid, but inexperienced buyers really should not take the risk of engaging in a transaction without a buyers agent involved.