Investors find flaws in FHA anti-flipping rules

Restrictions on resale price, same-day closings irk some

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted May. 14, 2010

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Restrictions on resale price, same-day closings irk some

Steve Bergsman
Inman News

In February, the Federal Housing Administration suspended for one year a regulation designed to hold back "flippers," or investors who acquire single-family homes and then put them back into the market very quickly, often within 90 days.

One would think this would be party time for flippers -- and it is! -- but there are some caveats within the rule suspension that still limit completely unabashed flipping.

At least the handcuffs are off and that's welcome news.

As Paul Barrow, the fellow behind thePrivateMarket.com, extolled, "This will be music to investor's ears everywhere! We no longer have to wait and plan to hold for 91 days to contract and sell, fix and flip projects to first-time homebuyers."

A little history first.

Back in 2003, the FHA decided to no longer approve loans on properties that were resold within 90 days of original purchase. In those halcyon days, the FHA feared flipping homes was causing prices in individual neighborhoods to unnaturally boom. Of course, back then everything was booming, and flippers -- they prefer to call themselves investors -- wondered why they were being singled out.

Flippers have historically been mischaracterized and demonized, says JP Moses, founder of REI tips, or www.reitips.com. He is also a self-proclaimed flipper and his website was created as a nexus for those in the business.

There are a small number of bad apples in this industry as there are in any industry, but they shouldn't soil what is essentially a good, efficient and legal business. Unfortunately, they do.

"I feel strongly that the real estate investor has become kind of a scapegoat," he says. "Realtors have lobbyists working on their behalf and multimillion-dollar budgets dedicated to enhancing their image. Investors don't have anything like that."

So how did Moses feel about the FHA reversing course?

"It's hilarious to me," he exclaims. "The FHA is admitting the 90-day seasoning has hindered neighborhood redevelopment. Thank you, and in today's economy that is a positive step, but why not listen to what you are saying and just eliminate the rule altogether? It's not doing anyone any good."

In Moses' view, flippers are among the few groups of active investors at the forefront of redeveloping communities hard hit by waves of foreclosures and abandonment. That's because they buy the REOs, rehab the properties and then put the homes back on the market as quickly as possible.

"Who else is going to buy the flood of REOs, especially the ones in bad shape?" asks Moses.

The rationale behind the FHA's change of heart -- albeit temporary -- was that the agency concluded that acquiring, rehabilitating and reselling of REO properties often takes less than 90 days and prohibiting the use of FHA mortgage insurance for a subsequent resale within 90 days of acquisition adversely impacts the willingness of sellers to allow contracts from potential FHA buyers.

That's because buyers must consider holding costs and risk of vandalism associated with allowing a property to sit vacant over a 90-day period of time.

"This will translate to lower holding costs, more projects and higher-quality inventory for buyers because if we are able to sell a property then we can buy another property faster," says Barrow. "It will turn ugly houses into residences first-time homebuyers want to purchase."

Barrow is an investor, and his company, Private Market Real Estate in Denver, offers opportunities for others to invest in flip or rental opportunities.

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