The Flap Over Flipping
Friday, May 4, 2012
From the May/June issue
FHA's anti-flipping waiver
permits the practice through 2012
By Grace Anne Glavin, Esq.
Traditionally, to protect potential homebuyers from property flipping and unseemly profits gained by matching buyers and sellers by persons who are not real estate licensees, the Federal Housing Administration has enforced its strict anti-flipping regulations as part of its guidelines. Under normal circumstances, FHA will not insure loans wherein the middleman seller has owned the property less than 90 days. This guideline prevents the seller from quickly obtaining a higher price than just paid from a buyer who is not aware of the transaction.
What is wrong with flips?
The increase in price evidenced by the flip is not usually supported by any current appraisal. In addition, the middleman seller has acted like a real estate licensee in terms of bringing parties together, and his profit is more like a commission for finding an end buyer than a true gain realized by property appreciation or property improvement.
What is the FHA anti-flip waiver?
In an attempt to help stabilize the housing market and avoid neighborhoods full of vacant houses, FHA lifted its anti-flipping restriction in 2010 through the end of 2011. Now, it has extended this waiver through December 31, 2012, meaning that flips are allowed.
Are all flips of single family residences allowed to be financed by FHA loans?
No, there are certain strict conditions:
- The contract and closing documents must disclose any interest between the buyer and the seller and any third parties that have an interest, meaning the "flip" must be disclosed.
- The property must have been marketed fairly and openly.
- Where the increase in sale price in the second transaction (sold by the middleman seller) is more than 20 percent above the middleman seller's acquisition price, the lender must justify the increase in value through substantial renovations and improvements.
- The property must not show "multiple" title transfers during the past 12 months.
Do all lenders administer these rules the same?
Not necessarily, as extra underwriting conditions for any transaction as to property valuation or borrower qualification may be prescribed by a lender as to different types of loans concerning recently or simultaneously transferred property.
Grace Anne Glavin, Esq., is owner of Law Offices of Grace Anne Glavin, P.A., and Morgan Title Company and can be reached at firstname.lastname@example.org. She is also a founding board member of the Central Florida Real Estate Council.
CFREC provides this column on real estate law issues as a service to ORRA members to provide a general understanding of the law on various topics of interest, not as a substitute for individual legal consultation, and should not be relied on in specific situations without consulting with a real estate attorney. For more information, please visit www.centralflrec.com.