WASHINGTON -- Rehabbers and real estate investors rejoice: You'll still be able to sell houses to first-time buyers using low-down-payment FHA-insured mortgages next year, even if you've owned the fixed-up property for less than 90 days.
The Federal Housing Administration has decided to extend its rule permitting loans on quick “flips” of renovated houses beyond the scheduled Dec. 31 expiration deadline. The policy is widely considered one of the key federal government moves that encourage private investors in large numbers -- often small-scale operations -- to buy foreclosed and deteriorating houses from lenders and then repair them and resell within short periods of time.
Since the plan was first put into place by the Obama Administration in February, 2010, more than 65,000 renovated houses have been financed using more than $11 billion in FHA-backed loans, according to federal officials. Roughly 23,000 of these properties were acquired and resold with FHA loans within the past year alone.
The idea, according to Carol Galante, the acting FHA commissioner, is to help “stabilize real estate prices as well as neighborhoods and communities where foreclosure activity has been high” by making it easier for investors to buy, fix up, and sell run-down houses that add to urban blight and depress values. The primary purchasers of the renovated properties are first-time, moderate-income families who might otherwise be frozen out of the market because they don't have the down payment required for a conventional loan. FHA down payments can be as low as 3.5 percent.
The Obama administration's initiative in 2010 was a reversal of restrictions on flips imposed in 2003. After scandals in Los Angeles, New York, Baltimore, the District of Columbia, and other large cities over widespread fraudulent flips -- where houses sometimes resold for double their previous price within days or even hours -- FHA stopped insuring loans on houses owned by sellers less than 90 days.
Bruce Calabrese, chief executive officer of a Columbus mortgage company, said the essential ingredients in FHA's revised approach are its strict controls on appraisals, inspections, and chain of title to ensure “that there is no funny business going on.”
FHA's policy requires property sellers to comply with a detailed list of standards. Among the most prominent:
● All transactions must be arm's-length with “no identity of interest between the buyer and seller or other parties” involved in the sale. A buyer can't purchase a house from a relative at a bargain price, hire another relative to do a few quick repairs to it, then resell it for a huge profit to an unsophisticated buyer, supported by a hyped-up appraisal signed by a friend or partner.
● The seller of the rehabilitated house must have clear legal title to it. Some flippers during the late 1990s took over a property one day, slapped a little paint on the outside, and sold it the following day.
● If the selling price is 20 percent higher than what the house cost the seller, a second appraisal, conducted by a member of FHA's panel of approved appraisers, is mandatory to be certain the improvements justify the increased price.
● An independent inspection report, conducted by a professional with no connection to other participants in the transaction, is also mandatory when the price jump is more than 20 percent. If the house still needs repairs that could affect the “health and safety” of the purchasers, the repairs must be completed and a re-inspection conducted before the closing.