I Have Seen the Promised Land...

Can it be true? Is the 91 day FHA seasoning rule no longer in force? Are short sale investors about to enter the “Promised Land” and be able to sell their flips to FHA buyers?

The federal government is so desperate to stabilize the housing market that FHA restrictions are being relaxed. It is good news for investors.

The FHA released brand new rules regarding financing and insuring properties that are flipped or re-sold quickly.

The consensus is that this FHA property flipping waiver is a huge for investors. And it is.

Allow me to share with you a few bullet points:

1. This waiver is very good news.
2. This waiver does NOT necessarily mean that you will be able to do back to back same day closes to an FHA end buyer.

Since the announcement around 5:00 p.m. EST on Friday, January 15, The SREC office and Jeff Watson’s law office have been blowing up. The consensus is that this FHA property flipping waiver is a huge boon. Lots of people are citing links to it but very few people have actually taken the time to read it, break it down, digest it and offer comments about where they think the business is going as a result of this recent property flipping waiver.

To summarize the MAJOR points of this waiver (just in case you don’t read it or don’t understand it):

1. All transactions must be arm’s length.
2. Assignments of a contract for sale will trigger a red flag.
3. The seller holds title to the property.
4. Entities such as LLCs, corporations, and trust must be properly established and operating in accordance with applicable state and Federal law.
5. There is not a pattern of previous flipping activity for the subject property, so if the property has been wholesaled two or three times in the last 12 months I doubt you are going to get an FHA loan on this. If you bought it via a short sale from someone who was losing it in foreclosure, I think you will be in good shape.
6. The property must pass at a minimum the FHA inspection. The program does not apply to reverse mortgages.
7. Most importantly, items 6 and 7 in the waiver make it very clear that this elimination of the 90 day resale restriction clearly applies to private sales of property for resale, therefore the entire restriction set forth in 24 C.F.R. § 203.37a (b)(2) is waived for a one year period. This waiver will end one year from Feb 1st 2010 which means on or about Jan 31st 2011.
8. The title company that you use and the particular lender that your C buyer selects will become crucial as to whether you will only need 30 day money or whether you will need money for longer.

Allow me to explain in a little more detail. Upon closely reading this waiver, you will see that they require that the “seller holds title to the property” thus the investor seller must be the owner of record.

The interpretation of the phrase “the seller holds title to the property” will be pivotal.

Allow me to speculate. Given the bureaucratic tendencies of FHA underwriters and given their long entrenched habit of comparing the date of the purchase and sales agreement against the date of the seller’s ownership I believe that with this new waiver FHA underwriters will require the sellers to be the owner of record as of the day that the purchase and sales agreement (B to C ) is executed.

Does this mean that you will be able to sell via a same day back to back closing to an FHA end buyer? I don’t think so. I think you will be able to sell in 25-30 days.

I hope I am wrong!

And only time will tell. I am smiling but not doing the happy dance yet!

Considering the past policy interpretations of the FHA underwriters, I believe that this means that they may very well expect to see the investor/seller be the owner of record as of the date the contract to sell to the FHA insured buyer is executed. This means that you can close on Monday, go into contract on Tuesday, and hopefully close in 30 days. This is a vast improvement over 91-140 days.

The next salient point is that if you are selling it for 20% more than what you bought it for, you are going to face a higher level of scrutiny in the underwriting process. So, if you can buy a property for $300,000, resell it for less than $360,000 you are going to be fine – but still be prepared to have to come up with the $300,000 and hold the property for a period of time, if you choose to sell to an FHA end buyer.

Sophisticated title companies such as Old School Title and a few other ones that I work with may be able to expedite the process through unique and proprietary business practices that they use to work with FHA underwriters. If you are not working with a cutting edge and industry-leading title and escrow company, now is the time to get with one.

Going back to the actual three page flipping waiver, you will note that the rationale behind this waiver is the recognition that people can buy properties, substantially rehab them and improve the value of them in less than 90 days, so don’t be surprised to see certain FHA underwriters still looking for proof of what you have done to enhance the value. You may in some instances be able to rely on the Freddie Mac Attachment A argument from October 2009 regarding the difference in value is the market reaction to you paying off all of the liens and clearing up the title issues, thus increasing the value of the property. Or, you may have to show receipts for paint and carpet with accompanying before and after photographs.

By now, I hope you realize that I do not see this property flipping waiver as the sudden opening of the bank vault with no security guards anywhere in sight. Rather, I see it as a significant but limited move by our nation’s “housing authority” to try to address the illiquidity in the residential real estate market.

The end result for you:

I want it to be very clear that everyone will still need their short term brokerage funding, particularly 30-60 day funding, maybe less, to capitalize on this policy change by the FHA.

You will still have to buy and fund this deal and then go through the process of selling to the FHA end buyer.

However, it’s a whole lot easier to find 30-60 day money than 90-120 day money.

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