Flipping homes is a way that many real estate in Ormond Beach investors make a quick profit. They purchase a house for an amount that is lower than its value and turn around and sell it for an inflated price after working with an appraiser to increase its value. This practice, known as “flipping” is not allowed by the FHA and, in fact, is looked upon extremely poorly by them. They do not take any chances dealing with any type of investor that could potentially flip a house and have put forth strict rules to ensure that this does not happen, not allowing FHA loans anywhere near house flippers. There are ways around the stipulations as a buyer, but you have to be patient and wait out the time periods that are strictly set forth by the FHA.
The Time Frame
The first way the FHA prevents flipping houses is by setting a specific length of time that the home seller must own the home before he can sell it to a borrower with FHA financing. That time period is 90 days, but that is not the end of the road, there are more specifications following. Basically, what this means is if a seller were to put his house on the market between 1 and 90 days from the date of his closing when he bought the home, no FHA buyers can purchase the home. This limits the market to which the seller has to sell his home too, but it is the FHA’s way of protecting themselves and their borrowers. The FHA sticks hard and fast to this rule, eliminating any FHA buyers from the pool with this requirement.
The Longer Time Frame
Now, if the home you wish to purchase is outside of the 90-day window, you might think you are home free and can use FHA financing for the home, but there are still strict rules to protect everyone involved in the transaction. If the timeframe when the seller acquired the home is between 91 and 180 days, the lender must determine if the new price which the seller is turning around and asking for the home is more than 100 percent over the price that he paid for the home. If it is, then the FHA lender will require that another appraisal be performed. This new appraisal will then get compared to the original appraisal; if the value on the 2nd appraisal is more than 5 percent lower than the first value, the lower value must be used. This is another way to protect the buyer from purchasing a home that is not worth the value that the seller is asking – the FHA assumes the seller is trying to make a quick buck and they do not want to guarantee a loan for that type of transaction.
Exceptions to the Rule
As with any other FHA rule, there are exceptions to the flipping rule. Because the rule was put in place simply to protect borrowers and lenders from purchasing a home with an inflated value, these exceptions are meant to make it easier to finance homes that might be sold quickly, but have a different reason for doing so, rather than just to make a quick profit:
- An employee that purchases a home from their company after the company bought the home recently from an employee that they transferred elsewhere
- Sales that are handled by the United States government
- Sellers that did not purchase the property, but rather inherited it and now want to sell it
Backing up the Higher Cost
Any seller that wants to turn around and sell their home within the 91 to 180 day window will need to have ample proof of the reason that they are asking the higher price for the home, especially if the second appraisal does not back up their reasoning. The reasons should include proof, such as receipts for any upgrades performed or work done on the home as well as a detailed listing of what was done to the home to help back up the reason for the higher cost. This reasoning cannot include any repairs that were done to the home – strictly new improvements, such as additions or remodeling that was done to the home to make it better. In addition, the seller should anticipate paying for the 2nd appraisal as it is not allowed to be charged to the FHA borrower.
Homes are Available
This anti-flipping rule might seem to really limit your pool of homes that you have to choose from, but in reality, this is not the case. What the FHA is trying to do is protect you from purchasing a home that is not worth the asking price. They would do this in any situation, not just one that the home is being flipped rather quickly. If a seller really wants to sell a home, they will wait the 90 day waiting period to enable FHA borrowers to have access to the home. If they do not wait the required 90 days, chances are that they know the 2nd appraisal would not align with the price they are asking for the home, so they would not be able to market to FHA buyers anyways.
If there is a home you really want to purchase and FHA loans are your only option, you can try to wait the time period out to see if the home is still on the market. Most sellers so not turn around and put the home on the market on the second day the own it – they will typically do some work to the home to try to have reasons for the higher price of the home. That being said, it is typically rather easy to hit that 90-day mark, allowing you to have FHA financing as an option on the home. As long as the value of the home checks out, you will be able to purchase the home you desired after all.