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Husband and I put an offer in on a 'flip' house last night. Broker called our realtor and said we cannot finance with FHA (which was the plan, actually we could do either FHA or USDA) because has not closed on the property as of yet - his words to my realtor were he can sell and close on the property just prior to closing with us (right now we slated for an on or before April 30) ...He says he does this all the time..
a) is this legal/normal?
b) I just googled and read the FHA has suspended their 90 day flip policy until Feb. 2011 - wouldn't that make this a moot point?
We've put communication in to our lawyer and are waiting to hear back, but just curious to see if anyone had any similar stories or knowledge...
Location: Danbury CT covering all of Fairfield County
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I am pretty sure you can get FHA on a flip house if the seller can provide evidence thatvalue was added to the house. That is what I was told me a lender in my area a couple of weeks ago because I have a flip listing coming on very soon.
We actually just went through this with a SS house, although the deal fell apart for other unrelated reasons. What was communicated to us was that this is a fairly common, if somewhat shady, practice. An investor buys up the property at auction for a downpayment of around 10k with the agreement that they will transfer title by XYZ date, or they lose their 10k and the house goes back to the bank. Since they don't actually obtain title until the closing date, it's a somewhat more complicated transaction and many financiers don't want to deal with it (also, like I said, it's slightly shady although completely legal). So perhaps what they meant was that it is difficult to find a bank who will finance this transaction, and even more difficult to find an FHA lender who will back it. (FYI, we had specific contacts at Salem 5 we were speaking with when we were trying to buy the SS-that-became-a-flip house, that's one MA bank that deals with these sorts of transactions!)
You are correct, there is a waiver on the flip rule. However, many lenders have overlays, and underwrite stricter than FHA. You want to find a lender that underwrites to the FHA guidelines with no overlays. The exist, we sell loans to them.
I know BofA isn't following the new rule, as a friend over there just referred a loan to me that they wouldn't do.
This announcement was not delivered in the usual manner, a mortgagee letter, but what is called a "CFR" or Code of Federal Regulations. Because of this, some banks will not recognize the change until put in a mortgagee letter. (don't mess w/ their structured procedures) The original flip rules had good intentions, but it closed down investors that were fixing up the homes and then selling them. Investors stopped buying because they had to carry them too long. If the mark up is more than 20% from the original purchase, documentation regarding the work will be required. This is meant to close the loophole for sweetheart flips (someone "knows" someone at the bank).
Last edited by SmartMoney; 03-06-2010 at 05:01 PM..
Reason: added last paragraph
Thanks for all replies.. although I'm still slightly confused. The second response seemed to be more on target.
My Realtor is very concerned that the broker isn't the current owner of the property - and therefore what if he cannot close on his transactions in time, and therefore we cannot close in time and would likely lose on time and the homeowners credit.
The broker of this property, while he seems like an unconventional guy, is encouraging us to talk to his lawyer and can affirm this has been done time and time again.
Our lawer and our realtor have our interest in hand, which is quite reassuring... On the other hand, this broker is either prepared to look like a complete fool OR is actually valid in his points. Which makes me hesitant that my realtor gets so ticked off at him. I wonder if Realtor relationships can ruin properties for the buyers??
It's so complicated. I'm waiting to talk to my lawyer tomorrow but my fear is they'll all tell me to back out just because they've never dealt with it - not because it's hasn't been successful before.
I adore this house. I'll be crushed if it gets taken from us.
Ok, here is the deal on the 90 day flip rule and waiver thereof.
Redpanda was close, but not quite on the mark. The investors aren't "buying" the property at auction. They are actually approaching the owners just before the auction, and contracting to buy the house. They bring the loan current enough to postpone the foreclosure and then start looking for a new buyer at a higher price. He waits to close on his purchase until basically the day he is closing on the sale to you ("simultaneous closings"). That way, he never has to come up with the money to actually pay off the loan, and neither does the original owner (Edit* - until you, the end buyer, closes on the house). The owner gets their house sold, and the "middle man" makes a profit. You get screwed, basically, because you bought the house for way more than the owner was willing to sell for. This process is usually called an "illegal wrap" and is the reason this law was put into place (Edit* - it is not technically illegal to "wrap" a mortgage in all states, some states it is, but not all. However, if the loan has a "due on sale" clause, the lender can call the loan due if they find out this is taking place).
The reason the waiver was put into place is because the rule was inadvertantly affecting the ability of actual legitimate remodelers to sell a property. If you buy a property that is in disrepair, and fix it up, you can sell it at a profit and still be under market and sell quickly, but if the remodel takes less than 90 days, you have to wait to put it on the market, which wasn't the intention of the rule.
In your case, I would guess that the seller is one of those who the rule IS meant to cover, and the 90 day FHA rule WOULD NOT be waived in his case.
But what if an investor bought an REO at a discounted price and closed on the property. Can someone with an FHA loan buy that property from the investor around the original listing price thereafter? That way, everyone wins right? The banks get a poperty off their shoulders, the investor makes a quick little profit, and the ones with the FHA loan get a home that they would probably lose out on in a bidding war because of their FHA financing (from possibly a cash investor! Or conventional loan).
Lacerta--thanks for the clarification, but it actually isn't accurate in the case I described--the property we were working on a short sale for WAS sold at auction as I described, and we were working with the new owners (investors) to purchase it from them, but at a substantially LOWER price (20k). So it probably wouldn't have made sense for the investors to strike such a deal.
But then, who knows anymore? That whole deal was all kinds of bizarre.
Yeah this entire process makes me head spin. I think I understand, but could never describe it to someone.
I did get confirmation from my lawyer that the process is entirely legal and done often. He only cautioned that the financing may be an issue. If we went FHA the property would have to pass appraisal of purchase price versus selling price and if the margin was too great, we might not get financed. And we wouldnt know the purchase price until the very end of the deal, which would screw us of time and money.
My mortgage co. told me we should go USDA and there would be no stipulations whatsoever, so there should be no issue with financing at the end.
My Realtor feels better knowing the above two are more confident with the matter.
We know the biggest risk going into this is what if the flipper can't close in time, etc. like I said.
Of course now we crossed another huge hurdle (Xposted in House thread): The home has an inground pool, which USDA will not finance with.
But what if an investor bought an REO at a discounted price and closed on the property. Can someone with an FHA loan buy that property from the investor around the original listing price thereafter? That way, everyone wins right? The banks get a poperty off their shoulders, the investor makes a quick little profit, and the ones with the FHA loan get a home that they would probably lose out on in a bidding war because of their FHA financing (from possibly a cash investor! Or conventional loan).
Or does the 90-day rule come into play there?
My understanding is that the 90 day rule would come into play unless the investor did work to increase the value of the house.
Quote:
Originally Posted by redpanda
Lacerta--thanks for the clarification, but it actually isn't accurate in the case I described--the property we were working on a short sale for WAS sold at auction as I described, and we were working with the new owners (investors) to purchase it from them, but at a substantially LOWER price (20k). So it probably wouldn't have made sense for the investors to strike such a deal.
But then, who knows anymore? That whole deal was all kinds of bizarre.
I'm sorry, I shouldn't have said that you were incorrect. That really wasn't my intention. I just know of people who have bought dozens and even hundreds using the method I described, and my understanding is that that is the primary way it is being done. I should not have said that your way doesn't happen too. Actually, I don't understand the situation you described well enough to say anything about it one way or the other...
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