Flipping Over Flipping – 2012 Update

Property market
Image by alancleaver_2000 via Flickr

Lenders have become increasingly cautious about lending on properties that have been “flipped.”  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.  In the lending world, if a sales contract is written prior to a seller owning a property for 90 days the transaction is a flip.

 As a consumer or a seller or a real estate agent, how does this apply to you and why should you care?

Quite simply, your transaction may become a stressful, confusing mess if the lender and Realtor do not know how to handle a flip transaction properly.  For some loan products, lenders will issue a decline if the property involved is a flip.  Ask your Loan Officer if they are aware of what constitutes a flip and how and when these transactions can be funded.  The last thing that anyone wants is to have a transaction declined at the last-minute.  For those of you that are Realtors, the best thing you can do is to make sure to notify your Loan Officer right away about how long the seller has owned the property.

Recently FHA extended an exception to their flip guidelines.   See related information about the current exception here.  For FHA loans when a seller has owned a property for less than 90 days it is still possible to complete the sale as long as the sales price is no greater than 20% above the amount the seller paid for the property.  If the increase is greater than 20% a second appraisal will be required along with a home inspection ordered directly by the lender.  It’s very important that investors are aware that health and safety issues identified in the home inspection will need to be addressed prior to closing.  This can be a challenge if the seller or investor is unprepared or unwilling to do repairs to the property.

If it all possible, it’s best to wait until the seller has owned the property for at least 90 days to even write an offer if financing will be needed.  This is especially important for conventional financing since most lenders will not fund flip transactions with a Fannie Mae or Freddie Mac loan.

If you have questions about your transaction or about current guidelines, Sara and I are here to help.  Give us a call at 503 496-0400.

In the meantime, good luck with your purchase or sale!


4 thoughts on “Flipping Over Flipping – 2012 Update

  1. Great article. Good for FHA! I hope they maintain or even soften their stance on flipping. In my experience, flipping houses usually improves the neighborhood. My clients usually buy the worst house on the block and make it the nicest house on the block before they re-sell it.

    1. Thanks Brian. You are completely correct – most investors are really improving neighborhoods and filling a need that others in the community cannot. I anticipate that FHA will harden their stance once the market improves. In general, I see more customers moving away from FHA and moving toward other products. I’ll be writing about that in the future as well. Thanks for taking the time to comment.

  2. I have a transaction where B of A foreclosed on a home, an investor bought the property at auction, did nothing but change the locks. The new buyer has B of A financing and they are still holding to the 20% rule. The property would easily appraise higher than the 20%. Doesn’t make much since.

    1. Chris –
      If the new buyer is using FHA for financing they can purchase the home even if the seller has increased the price by more than 20%. Some lenders will not honor the FHA exception. If that’s the case, the customer may want to look at using another Loan Officer. (Hint: we can do these)

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