By Diana Hill, Online Trading Academy Real Estate Investor Instructor
According to Wikipedia: "Flipping" is a term used primarily in the US to describe the practice of buying an asset and quickly reselling it for profit. Though flipping can apply to any asset, it is most often applied to real estate and to IPOs (Initial Public Offerings). When discussing flipping real estate, I prefer to use the term "quick turn."
I'm often asked if this strategy for real estate investing is viable in this market; my answer is absolutely. The investor who wants to focus on the "quick turn" method of real estate investing must have a well-thought-out plan and the tools to execute that plan. A big part of that plan is knowing whom to "flip" or "resell" the property to. In other words, who will be the buyer.
There's a policy that was established in 2006 by the Department of Housing and Urban Development that real estates investors who "flip" or "quick turn" properties need to be aware of in their planning process. The policy was established in a "Mortgagee Letter" that stated the following: "Property flipping is a practice whereby a property is resold in a short period of time after it is purchased by the seller for considerable profit with an artificially inflated value, often abetted by lender's collusion with the appraiser. FHA's policy prohibiting property flipping eliminates the most egregious examples of predatory flips of properties with the FHA mortgage insurance programs."
The primary component of the FHA anti-flipping policy is a 90-day seasoning period. "No FHA funding will be provided for properties purchased within 90 days of the seller's acquisition of the property. The intent of this policy is to protect buyers from overpaying."
As a quick aside, here is a brief description of the FHA Mortgage Insurance Program: The Federal Housing Administration, generally known as "FHA," is the largest government insurer of mortgages in the world. A part of the United States Department of Housing and Urban Development (HUD), FHA provides mortgage insurance on single-family, multi-family, manufactured homes and hospital loans made by FHA-approved lenders throughout the United States and its territories. While borrowers must meet certain requirements established by FHA to qualify for the insurance, lenders bear less risk because FHA will pay the lender if a homeowner defaults on his or her loan."
So back to how this affects a real estate investor. As a real estate investor for over 25 years, my goal has never been and never will be to take advantage of anyone. However, there are times and circumstances where, as an investor, I can make a profit as well as serve society. Here's an example: Today, there are many places where two out of three homes for sale are short sales or REOs. In this arena, it is very common that the seller of the property (institutional owners) won't consider offers with FHA financing. Institutional owners want faster escrows than can be expected if FHA financing is used. These distressed properties frequently are in poor condition, requiring repairs, and will often not pass an FHA appraisal. Effectively this means that an FHA buyer is out of the short sale and REO market. As an investor, I serve society by purchasing these kinds of homes, fixing them up and then making it available to FHA buyers. I add value to the property; does this mean the property is being sold for an artificially inflated value? Of course not.
On May 15, 2009, the US Department of Housing and Urban Development (HUD) announced that it is temporarily extending the property flipping waiver to May 10, 2010 for (FHA) loans. Under the waiver, homes that were foreclosed on and are being sold by the mortgagee or on its behalf may be purchased by FHA borrowers without regard to the 90-day seasoning period. The waiver does not apply to entities that purchase foreclosures either singly or in bulk for resale. Subsequent sales of such properties will continue to be subject to the standard regulatory requirements.
This waiver does apply to us as investors; however, it does open the door for organizations such as the National Association of Realtors (NRA), and its State affiliates to push for this waiver to apply to any property purchased from a distressed situation. Stay tuned.
There is a technique that I teach in class that allows investors to take advantage of buying these distressed properties and getting qualified buyers into the property faster than 90 days. If you want to know more, come join me at a workshop or class when I come to your area.
Great Fortune,
- Diana Hill
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