Monday, January 18, 2010

HUD LOOSENS UP ON FLIPPING RULES

One controversial rule regarding FHA financing - the one which states that FHA won't finance any home that hasn't been "seasoned" at least 90 days since its last ownership change - is being suspended by HUD until February 1, 2011.

The "No Flipping" rule, as it has been called, was intended to restrict FHA's exposure to flips, homes that are purchased out of foreclosure at steep discounts by investors, patched up, and then resold at a retail price.

For the past 18 months, flippers have been making big profits on the resales of distressed homes, as the $8,000 first-time buyer tax credit flooded the market with entry-level buyers who didn't want to do a lot of work. Since so many first-time buyers were (and are) using FHA financing, the "no flipping" rule caused complications for many buyers who did not know they would have to wait 90 days before submitting a contract on a flipped home.

But it also caused investors to be a little more deliberate in preparing these homes for sale, and encouraged a more thorough rehab before the home was re-listed on the market.

The new rule change will eliminate that waiting period. And so it will encourage more flipping.

With the current first-time buyer tax credit set to expire April 30, our market figures to stay very hot at the entry level for the next 90 days.

I have looked at hundreds of flips over the past few years... some done well, and some that were terrible. With any flip, a thorough, comprehensive home inspection is totally critical. As is a sewer scope, a furnace check-up and a roof certification.

Rule of thumb on flips: if the stuff you can see isn't done well, then you know the stuff you can't see is even worse.

While many flips look pretty, be very careful with them. And now that HUD is relaxing its "No Flipping" rule, there's even more reason to be cautious as many investors look to make a quick buck before the tax credit goes away.