Buyer Beware: Flipping Rules Can Cause Delays

No, I’m not using “flipping” as an expletive; in this case, the word “flipping” is referring to the practice of buying a distressed home, fixing up, and then reselling it for a profit.  It’s something that seems to be extremely popular everywhere from late night infomercials to prime time HGTV shows.  It seems that flipping a property embodies the American dream – buy something that may be a diamond in the rough, put in some good old fashioned sweat and elbow grease to increase the value, and then sell it and be rewarded for your efforts.

As usual, the Federal Government seems to want to get in the way of a good thing and throw a wet blanket on your celebration by the rules that they have established for some loans.   While the intent of the rules are to prevent fraudulent property flipping – which is a scheme involving a seller, a straw buyer, a real estate agent, a lender, and an appraiser working together to defraud a lending institution by purchasing a home and quickly reselling it to the straw buyer at a drastically inflated price who has no intention of occupying the property or ever making payments – the unintended consequence is that it adds some road blocks to legitimate investors and potential buyers.   So, knowing the rules is key to making sure that your buying or selling process is smooth.

Below are the rules as I understand them as of today.  The rules change frequently, so you’ll want to verify them with your lender and real estate agent if you are contemplating a sale or purchase.  Also note, the purchase date is defined as the day that the property transfers legally as evidenced by the records of the County Auditor.  Resale is defined as the date of the purchase contract.

FHA:  For FHA loans, there is a strict 90-day rule.   That means that the resale date (Contract Date) cannot be before 90 days after the property has been transferred at the Auditor’s office.   After 90 days, there will be additional documentation required and two appraisals will be required if the resale is before the 180th day after the initial purchase date.

VA Loans:  Vets get a break and there is no waiting period from the purchase date to the resale date however the seller must be able to justify the circumstances of the purchase, i.e. explaining that it was a bank sale, Sheriff’s Sale etc. and can document at the discretion of the appraiser, the improvements made to the property.

USDA Loans:  These guidelines are the same as for VA loans.

Conventional Loans:  These may vary from lender to lender, but generally if the buyer is putting at least 20% down, there is no waiting period.  In the event that the buyer is putting down less than 20%, then likely the company providing the mortgage insurance will insist on the 90-day rule and the waiting period will apply.

Despite the rules, flipping a home can be a great thing.  It creates opportunities for investors, jobs for contractors, home centers, and a great product for buyers to purchase.

Special thanks to Bill Channell of Union Home Mortgage for helping me to understand the rules.  Bill is a great resource for knowledge of home loans and refinancing — I highly recommend him!

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