Flipping over Flipping

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I remember back in 2003 when FHA and a handful of lenders started creating policies about flipping properties.  For those of you that aren’t aware of the term, a “flip” of a property refers to the rapid sale of a property from the time it is first purchased to when it is sold.

When FHA put official rules in place in 2003 they indicated FHA would only insure loans in which the seller had owned the property for 91 days or longer at the time the sales contract between buyer and seller was executed.  In the last couple years FHA has relaxed its position and will allow flips to occur within a shorter time frame but with restrictions.

As is true with many things in life, not all flips are created equal.  In general, I find nothing wrong with an investor acquiring a home at a low price and selling the home at a higher price.  At the same time, it should be understood that many buyers purchasing these properties are first time buyers with limited financial resources.  In addition, many of these same buyers are using programs that require a small down payment, such as FHA.  The combination of limited financial resources on the part of the buyer and maximum financing on the part of the lender requires greater scrutiny of the transaction.

In my opinion it is in the best interest of our industry and the best interest of our clients to ensure that flipped properties are sold at prices that are sustainable and that whatever work has been done is done to professional standards.  Too often in the last few months I have seen properties hastily rushed to market with minimal upgrades and/or faulty workmanship.

Our current market conditions bring about great opportunities for investors and buyers alike.  I expect that lenders will continue to finance flipped properties cautiously and with restrictions.  Personally, I can’t find fault with that.

Overall, I urge fellow professionals to look out for our consumers in this environment when flipped properties are involved.  We need to expect that these transactions will face greater scrutiny and are perceived as being a higher risk to the investors that ultimately fund and/or insure them.  Before an offer is accepted, all parties to the sale should have realistic expectations.

I expect our industry to continue to flip over flipping.  My overall advice is to work with professionals that understand the guidelines involved and are committed to ethical and responsible practices.


3 thoughts on “Flipping over Flipping

  1. You say that these newly renovated properties represent a greater risk to the investors that fund and insure these properties. Sure, there may be some flippers who cut corners and do an inferior rehab, but overall wouldn’t it make sense that the vast majority of these rehabbed homes are a better product and a more solid investment than many homes that are in poor condition and lack upgrades and basic maintenance? I say encourage the rehabs, perform due diligence but don’t think they are any more risky than a home that hasn’t been updated or maintained.

    1. Jim –

      I don’t necessarily disagree with you. But I probably should clarify a couple of things. First, from 2003 until a couple years ago FHA didn’t allow a seller to enter into a contract with a new buyer prior to the 91st day from acquisition of the property. Currently FHA will allow contracts to be written prior to 90 days; however, there are additional requirements if the property is being sold for 20% higher than what it was acquired for. One requirement is an additional appraisal and the other is a home inspection. Of the five “flip” properties I have seen in the last couple months I have been shocked at what the home inspections have revealed. Call me naive but I honestly thought there would be a minimum amount of work that would be performed by the seller/investor prior to marketing the property. So far, that hasn’t been the case.

      Second, lenders define a flip – loosely – as a property that has been purchased and placed under contract in less than 90 days. The risk to the lender is that the seller has done nothing to the property other than increase the sales price to the maximum that the market will bear. An additional risk is that the investor has never had a long term interest in the property but rather is looking to the sell the home for the maximum profit in the least amount of time. This is why lenders are more suspicious of investor/flippers – they are a party to the transaction that is more likely to cut corners to keep costs as low as possible and maximize profits.

      Using FHA as an example once again, lenders do look at flip properties differently if substantial rehab has truly been done to the property. There is less concern both from a valuation standpoint and consumer standpoint if substantial work justifying an increase in sales price has taken place. When everything is said and done, the overall concern and responsbility of the lender is to ensure that a property is structurally sound and safe for the consumer. The home inspections I have seen as of late illustrate that basic safety and structural issues are not being addressed. I’m not qualified as a builder or as a home inspector; however, it has been very eye-opening to see just how little has been done with these properties.

      Once again, I don’t take issue with someone making a profit. I don’t think it’s a crime for an investor to purchase a home for less than what it is worth and to then sell it for what the market will bear. I also completely agree that some of these properties on the market need to be fixed up and then put back on the market.

      In your case, it sounds like you are truly renovating homes. I know of several companies in Oregon that do fantastic rehab work and truly improve the houses that they purchase. They have a minimum standard that they adhere to and are professional and knowledgeable. They don’t hide deficiencies with fresh paint and carpet. They are doing things the right way and it sounds like you are too.

      In the last couple months; however, I have seen both customers and lenders placed in compromised positions as a result of investors that have not performed a minimum standard of work. I think you would have been shocked as well.

      Thanks for writing and sorry for the wall of text. Good luck to you with your business.

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