Kirk M West's Blog

I am sure that you have heard that FHA is easing the flipping rules, however, trying to find investors who are willing to play is another matter.  Don't worry we are currently offering the program but these are the guidelines according to HUD with my interpretation:

The purchase transaction must be "arms-length" with no identity of interest between borrower and seller or any other parties participating in the transaction (Note: FHA defines “identity of interest” as “a sales transaction between parties with family relationships or business relationships.”) FHA suggests the following methods to assist in determining that no “inappropriate collusion or agreements” exist between parties to the sales transaction:

o Seller holds title to the property.

o If the seller is an LLC, corporation or trust, the entity must be established and operated in accordance with applicable state and federal laws.

o There is no pattern of “previous flipping activity” for the subject property.  2 or more title transfers within the most recent 12 months constitutes previous property flipping activity.

o The property was marketed via MLS, auction, for-sale-by owner or developer marketing. “Sales contacts that refer to an ‘assignment of contract of sale,’ which represents a special agreement between seller and buyer may be a red flag.”

o This is where the kicker lies since most investors want a greater than 20% profit, not including fix up cost: 

If the sales price is 20 percent or  higher than the seller’s acquisition cost, the property flipping waiver applies only if the lender obtains the following documentation:

1. Evidence the seller has completed sufficient legitimate renovation, repair and rehabilitation work to substantiate the increase in value (contracts and paid receipts and/or a second appraisal indicating repairs completed and the value of those repairs). If no or minimal repairs were completed, the appraiser must indicate the reason for increase in value since seller acquisition.

2. Copy of a property inspection completed by an inspector having neither an interest in the property nor a relationship with the seller. The property inspector must be paid by the lender, but the borrower may reimburse the lender for the inspection. The inspector may not pay anyone for referral of the inspection and may not receive compensation for referring or recommending contractors to complete recommended repairs. The borrower must receive a copy of the inspection report prior to closing. The inspection must include all of the following elements:

1. Property structure, including foundation, floor, ceiling, walls and roof.

2. Exterior, including siding, doors, windows, appurtenant structures such as decks and balconies, walkways and driveways.

3. Inspection of roofing, plumbing, electrical, heating and air conditioning systems.

4. Interior inspection.

5. Inspection of insulation, ventilation systems, fireplaces and solid-fuel-burning appliances such as wood stoves.

In addition, as of February 15^th, FHA now requires the appraisals to be ordered through an appraisal management company (FHA’s take on the HVCC process) so we no longer have control on what appraiser will review the property. So with the appraisers now making less on FHA appraisals and the risk of a property default on their shoulders if the property is over valued, I do not foresee too many appraisers giving “reasons” (and this interpretation is wide open!!) for the increase in value. Also, be prepared for the need of two appraisals.   

So this will open the market a bit for more FHA buyers, if you are listing any “flipped” properties, start prepping your seller for the items we will need for an FHA loan.   

Please feel free to contact me with any questions anytime... I work for you.  (916) 893-9666.  Kirk M. West