For the past 4 years, investors and home buyers benefited from the Federal Housing Administration’s (FHA’s) waiver of its 90-day flip rule that addressed a housing market which was flooded with foreclosures. This waiver ended at midnight, December 31, 2014. This means that, effective January 1, 2015, FHA has reverted to its former policy of not insuring a property loan where title was transferred within 90 day or less. There are some exceptions to the FHA’s suspension of the 90-day rule. They are as follows:
1. HUD properties under REO
2. Sales by other federal agencies of REO properties
3. Sales of properties by non-profit organizations approved for resale by HUD
4. Sales by state or federal financial institutions such as Fannie, Freddie or GSE
5. Sales of HUD properties where the President declares it a federal disaster area
What are not exempted from the rule are properties that were bought by investors and/or developers looking to do quick fixes and then flip the property. Financing will still be available, but selling prices of the end product — rehabbed houses for moderate-income buyers — are almost certain to be more expensive and may have a detrimental impact on entry-level homebuyers. The 90-day flipping restriction by FHA might also have some negative impact on some investors. However, it might be very minimal as many property flips are either cash purchases or financed with hard money loans, which enable investors to fast-track their property re-sales and maximize their profits.
Here are five points to consider with respect to the suspension of the 90-day waiver:
1. An Inconvenience for Investors: The 90-day rule reduces the pool of homebuyers to those who are not using FHA financing. Investors who are flipping at price ranges prime for FHA financing will definitely feel the negative impact of this rule.
2. Missed Homeownership Opportunities for New Buyers: Some would-be FHA buyers will miss the opportunity for homeownership because investors will be more likely to work with conventional buyers who can be processed more quickly than the FHA rule allows.
3. Less Available Housing Inventory: We are no longer experiencing the glut of home foreclosures that existed in 2010 when the FHA waiver was initially implemented. With fewer available foreclosures, the suspension of the 90-day rule is not too significant. When FHA first implemented the waiver in 2010, bank-owned sales represented 44% of the entire California housing market (Source: RealtyTrac), and by the last quarter of 2014, they comprise only 5.7% of all sales in the state (Source: DQNews).
4. Longer Selling Timeframes: Realistically, many investors easily take 30 to 60 days to flip a property regardless of the 90-day ruling status. Once rehabbed, the property is commonly on the market for 30+ days. Consequently, many homes will meet the time guidelines to qualify for FHA financing. For example, in large metropolitan areas in 2014, housing flips in the third quarter of 2014 took an average of 185 days, slightly less than the 187 of the previous quarter (Source: Yahoo! Finance and RealtyTrac 2014).
5. A Boost to Conventional Loan Products: The FHA’s suspension of the 90-day waiver will steer some buyers to use conventional financing. More creative financing options are likely to emerge as buyers seek new ways to accomplish quick flips without FHA financing.
Vanguard Hard Money and its affiliates have provided this overview. For a detailed explanation of the FHA’s ruling please consult the Federal regulations and/or legal counsel.