So now they like us! Time changes everything!
In June of 2006 The Federal Housing Administration (FHA) had imposed a rule barring loans on homes sold after less than 90 days. Although FHA does not lend money to home buyers, it insures lenders against loan defaults. Borrowers who receive loans insured by FHA pay the insurance premiums. The “anti-flipping” rule was designed to discourage people from buying properties and reselling them at inflated prices without making appropriate repairs. Not all landlords are slum lords, and not all flippers were selling homes with shoddy repairs. There were enough, however, to cause alarm and put regulations in place.
Last year FHA announced an “anti-flipping waiver” which has now been extended through December 31, 2011. David Stevens, FHA commissioner, says the action will “help to move more foreclosed properties off the market and reduce the number of vacant homes in neighborhoods throughout this country,”
In today’s Real Estate crisis, the flipper plays a critical role in restoring value to neighborhoods with distressed homes. We are in a unique position to clear out distressed properties and prevent a further collapse in the housing market. As banks and government agencies are breaking under the weight of foreclosure properties, investors are waiting for the flood. We can purchase a distressed property, relieving the bank of a burden they are ill prepared to manage, and rehab it to a condition that now makes this home the best product at the best price in the neighborhood. This home sells or rents quickly because it has been newly renovated. The neighborhood no longer has this empty run down home attracting vandals and bringing down property values. If the house is flipped, the higher selling price brings up appraisal values for the entire neighborhood. Flipping is now viewed as an activity that revitalizes and stabilizes communities.
If you plan to flip houses this year I still have a few words of caution for you:
First, all transactions must be “arms length.” There can be no shared interest between the buyer and the seller.
In addition, this rule applies to homes purchased directly from a bank or government agency like HUD or the VA. If you purchase a home from a wholesaler, or other source, who recently purchased the home from a bank or government agency the waiver may not apply. The waiver includes language that prevents “a pattern of flipping”. My 17 year old son learned this all too well this past Summer when flipping his first house. We purchased the home from a wholesaler who had purchased it from HUD. My son did a great job selecting the level of rehab and his contractors completed the job in 3 weeks. He had a contract on the home a week later. His celebration was short lived when he realized the buyer would be securing an FHA approved loan and the lender informed him that they would have to wait until 91 days after he had purchased the home to close the new sale. He also had to supply documentation of the rehab to support a selling price greater than 20% more than his purchase price. Although he still made a profit on the deal, he incurred $2,200 in additional carrying costs because this home had a “pattern of flipping.”
Finally, flipping has inherent risks in a volatile market. The market can suddenly go soft leaving you holding the property much longer than you expected, or selling for a much lower price than originally anticipated.
Flipping, while a great way to raise capital, is not a long term wealth builder. You must invest some of the capital back into income producing real estate to really build wealth. This year holds great opportunity for both flippers and investors looking to acquire rental property. If a property makes a good flip it often makes a great rental. When flipping, our family investment strategy is to always buy properties that will cash flow for us if held as a rental. Having multiple exit strategies reduces risk and increases the fun! If the market goes soft on us during a flip we can refinance out to a 30 year fixed mortgage and rent the property with a positive cash flow. It is not as exciting, or immediately rewarding for my teenagers, but it is a way to insure we win no matter what the market is doing!
