HUD relaxes restriction on investor fix and flip
On
Monday, Jan. 18, 2010, the Housing and Urban Development Office temporarily waived
restrictions regarding reselling homes purchased and resold within 90
days. For the past three years, HUD would not guarantee FHA loans for a
home that had been acquired by the seller within the previous three
months, Buyers using government backed mortgages were unable to
purchase homes that had been reconditioned until the mandatory 90 days
had passed. For the next year, that restriction is removed in hopes of
stimulating the sale of foreclosed and distressed properties.
The new policy recognizes that most foreclosed homes require
improvements and that investors provide the capital, resources, and
manpower to bring the home up to an acceptable standard. The 90-day
rule added an additional cost to the investor, as it required incurring
3 months of additional interest payments and loss of available funds
for other investments, diminishing the return on the investment. With
prices falling for the past two years, the additional restrictions only
fueled the problem. The result was discouraging investments into
neighborhoods as homes stood vacant and often vandalized and
deteriorating over time.
There are other aspects that are required as part of the revised policy.
First, the sale must be at an arms length. In short, you cannot sell
a home you purchased less than 3 months ago to a family member or
someone with an “identity of interest.”
Second, if the new sales price exceeds 20% of the original
acquisition costs, there must be substantial documentation in the file
as well as 1-2 appraisals. In addition, the lender must order an
inspection to be completed with the report provided to the buyer prior
to closing. The lender has the right to recover the costs from the
buyer.
Third, the loan must be a new loan and does not apply to Home Equity
Conversion loans. For a full review of this policy, please visit
http://www.hud.gov/offices/hsg/sfh/waivpropflip2010.pdf
The bottom line for investors; You are now able to shorten the time
between acquiring a property and placing it back on the market for
buyers using Government back mortgages. If the new sales price is more
than 20% from the price you purchased the home for initially, you will
be asked to provide documentation to justify the increases. Best
practice is to establish an independent account detailing expenses and
fund used. It will ultimately depend on the appraisals to warrant the
increase is within market pricing and neighborhood values.
The bottom line for Buyers; You now have the advantage of finding a
recently updated home without having to wait till the seller exceeds 90
days. If you are using a Government backed mortgage program such as
FHA, you will have access to more home buying options sooner. In
addition, credible investors insure your new home has been brought up
to current building codes and improved the style and décor, minimizing
your initial expenses as well. Be aware that the process will require
documentation from the seller to justify the sales price if greater
than 20% and two appraisals are likely. In addition, the lender will
most likely charge you for an inspection they originate regardless of
the outcome of the inspection. This may be independent of the
Inspection deadline and resolution deadlines you present in your offer
to buy. Best practice is to discuss this scenario with your lender
before entering into an agreement or contract with a seller.
Investment in real estate often provides higher returns in
comparison to other traditional and less secured sources. Combined with
the incentive to new buyers, it is beginning to shift the landscape to
a more balanced marketplace. Boulder recovers faster and often,
neighborhood by neighborhood. It is important to be fully aware of the
history of the home and to know what has been done to improve the
property. Remember, compared to other investment opportunities, real
estate often outperforms traditional sources.