Obstacles for Home Flippers and the FHA Seasoning Rules
Federal regulation 24 CFR Part 203.37 restricts FHA Mortgage Insurance from being issued on a property that is re-sold less than 90 days from the acquisition date of the seller. This rule has been in place since 2003 to prevent fraudulent lending and flipping schemes. An example of this would be a buyer, seller, mortgage broker, and appraiser working together to artificially inflate the value of a home that results in a sale while the buyer lets the property foreclose and all parties split the profits. This is fraud, and should be harshly prosecuted. But the vast majority of property flippers engage in lawful and ethical practices when it comes to their business.
The FHA has waived this rule for lenders or state agencies that have acquired the property through a foreclosure action. This leaves property investors very much in the cold. The misconception is that flipping is illegal. This couldn’t be further from the truth.
Property flippers in Arizona play a vital role in restoring the value of neighborhoods plagued by the foreclosure crisis. The longer a property sits vacant the more dilapidated it becomes. AZ property rehabbers quickly bring a property back to it’s restored or enhanced glory. Neighborhoods begin to flourish again when markets are allowed to work freely and a sense of community is restored.
In the current housing climate, it’s more important than ever to let market forces correct and rebound naturally. The majority of buyers are seeking FHA financing due to it’s low 3.5% down payment requirement. Cash is in short supply for many Arizona families and cannot save 20% for a down payment for conforming or conventional loan products. This puts investors at a large disadvantage to banks and the Department of HUD because they are ensuring that their inventory sells before the property rehabbers does. A large segment of the buyer pool is automatically disqualified from buying a quality remodeled home within the first 90 days of the seller owning the property. While we can argue that these seasoning requirements should be waived for all property sellers. There are things we can do to ensure our business thrives.
Remember, we are in control of our transactions. We dictate what kind of financing options we will let buyers use. Most conventional lenders do not require seasoning although increasingly some lenders have started their own in house seasoning requirements to emulate the rules imposed by the FHA. It’s your job to make sure the buyers lender does not have strict seasoning rules in place. Most AZ property rehabbers can buy a property, rehabilitate and find a bona fide buyer within 30-45 days. So what do you do if the buyer wants to use FHA lending. I have heard of some sellers agreeing to a post occupancy agreement and leasing the property to the buyer prior to the execution of the contract. This inherently has caused problems for many transactions when the buyer fails to perform or is unable to qualify. Then, you have to worry about removing the tenant so you can put it back on the market. Having strict eviction provisions in place could make a transaction like this work. You could decide to post date the contract by separate agreement but if the buyer decides to walk you could be out valuable time and holding costs. A separate non-refundable deposit could mitigate some risk but may scare off the potential buyer. It’s a fine line to walk but I’ve seen creative solutions to solve seasoning issues.
It’s important to remember, the property can’t just simply close 90 days after the purchase. The contract must be mutually executed not less than 90 days after the purchase. This means on the 91st day a contract can be signed. It can take as little as 3 weeks to that point to close escrow. However, the 90 day clock starts ticking at the time of settlement. This means if you purchased the property at AZ Trustee Sale, The 90 day clock starts when you paid for the property. There is a common misunderstanding that the 90 day rule is from recordation. Recordation can sometimes be up to 30 days while you wait for the Trustee to produce a Trustees Deed upon sale.
There are also rules for properties flipped 90-180 days after the sellers acquisition. The same restrictions are in place if you are selling the property for more than 100% of the value of the sellers purchase. Additional documentation can be produced to waive this rule but it requires proving that you have substantially improved the property to that value. Before starting rehab, I recommend taking property photos, saving contractor receipts, and copies of inspection reports.
Understanding seasoning rules are vital when it comes to flipping houses in Arizona. It can mean the difference of hitting a home run or striking out. Call Don W. Juvan at 480-444-6110 for a free consultation on the Trustee Sale process in Arizona. We provide bid representation at all trustee sale locations in Phoenix, Maricopa County, Pinal County, and surrounding cities. Download our foreclosure list for Arizona by clicking here.