Our guides for flipping - one that jumps out is you DONT list on open market - see #9
HUD Definition of Property Flipping
According to HUD’s definition, property flipping is a practice whereby a property is resold a short period of time after it is purchased by the seller for a considerable profit with an artificially inflated value, often abetted by a lender’s collusion with the appraiser.
Flip transactions are also evident when chain of property title reveals several changes in property ownership in the course of a short time period.
FHA Prohibition on Property Flipping
In order to eliminate the highest risk examples of predatory property flipping transactions within FHA mortgage insurance programs, FHA requires that a property owner not accept an offer to purchase from a bona-fide buyer until the 91st day from the seller’s acquisition date of the property. Seller’s acquisition date is defined as the date that the seller legally took title to the property. This means that a buyer’s offer cannot be dated prior to the 91st day after the seller has taken legal title to the property.
The only exceptions to the minimum 90-day seller ownership requirement are for sellers who are considered
exempt by HUD (see list of exempt sellers below) or for those sellers who meet the requirements of HUD’s
temporary Property Flipping Waiver (see property flip waiver requirements and overlays below).
Exemptions to FHA 90-Day Seller Seasoning Requirement
The following entities are exempt from HUD’s minimum 90 day seller seasoning requirements and may re-sell properties in less than the standard 90-day minimum:
- State or federally chartered financial institutions (federal or state banks);
- Government Sponsored Enterprises (GSE) which include Federal Home Loan Banks, Fannie Mae, Freddie Mac, Ginnie Mae, Federal Farm Credit Banks, and Farmer Mac;
- Local or state government agencies;
- Non-profit organizations approved to purchase HUD REO property http://www.hud.gov/offices/hsg/sfh/np/np_hoc.cfm;
- HUD selling it’s own real estate owned property (REO),
- Any U.S. government agency of single family properties pursuant to programs operated by the agency;
- A person or persons who acquired the subject property through inheritance;
- An Employer or relocation agency that purchases and sells homes related to the employer’s company employee relocation programs;
- A builder selling newly constructed property; or
- A seller selling a property within Presidentially-Declared Disaster Area as communicated via a Mortgagee Letter specific to the disaster. Note: As of 02/2011, there are currently no areas that fall under this exemption.
All other sellers not listed above, including non-state or federal chartered lenders, individual/private sellers,
businesses such as sole proprietorships, partnerships, limited liability companies (LLCs), corporations, property management firms and real estate firms are considered non-exempt and are subject to minimum 90-day seller seasoning requirements, unless they meet the requirements of HUD’s temporary Waiver below.
HUD Temporary Waiver of 90 Day Minimum Seller Seasoning Requirements
Effective February 14, FIMC will honor HUD’s 2011 extension of the Property Flipping Waiver initially issued on February 1, 2010. Under the waiver, HUD lifts 90 day seller ownership requirements for non-exempt sellers involved with the resale of property intended for FHA insuring.
To qualify for the waiver of 90 day seller ownership requirements, the following requirements and restrictions must be applied:
1. The sales contract must have been executed on or after 2/01/2011 and may not include sales commissions considered excessive for the area;
2. The transaction must be arms-length with no identity of interest between the buyer and seller or any other interested parties in the sales transaction;
3. The seller identified in the sales agreement must be the same person or entity reflected as current owner of record on title to the property and as the owner of record on the FHA appraisal; any discrepancy must be explained and documented;
4. Sellers such as LLCs, partnerships or corporations must be verified as legitimate and in good standing through registration records at the business/corporations website for the applicable state;
5. Ownership interests for sellers such as LLCs, partnerships or corporations must be identified to validate no relationships exist between other parties to the transaction and to validate that the person signing on behalf of the business is authorized to do so;
6. Anyone signing on behalf of a selling lender or property disposition firm hired by the lender must document authorization to sign on behalf of the selling lender;
7. Seller must not have owned the property for less than 30 days at the time of buyer’s execution of the purchase contract;Added 10/11/2011
8. 12 month chain of title is required and must display no more than 2 total title transfers in the past 12 months (1 of the 2 being seller’s acquisition of the property). In addition, chain of title must reflect no intervening transfers between Sheriff's foreclosure sale to the Seller or from the Seller to our borrower;
9. Evidence the property was marketed fairly and openly via MLS. Marketing via non-MLS is prohibited;
10. File cannot contain any mention or evidence of an assignment of sale or assignment of contract of sale; meaning no party may be inserted between the transfer of title from the seller to our buyer;
11. An increase in property value/sales price from seller’s acquisition cost** to our buyer’s purchase price must be clearly referenced and documented in the FHA appraisal and the increase may not exceed 19.99%. Additional documentation, such as receipts or evidence of improvements may be required from the seller if the increase to value is not considered as justified in the FHA appraisal;
If the increase in property value/sales price is 20% or greater, refer to the additional requirements listed in the following section below.
**Seller’s acquisition cost = the purchase price which the seller paid for the property plus any closing costs, prepaid expenses or commissions paid by the seller at the time of purchase as justified with a copy of the settlement statement from the date of purchase.
12. Appraised value must be derived with comparable sales that do not consist solely of recently flipped properties.
13. For resale price increases of less than 20%, the loan must be locked directly with Flagstar or Wells Fargo. For resale price increases of 20% and greater, see the additional requirements listed in the following section. Added Flagstar & removed BofA 10/11/2011
14. The FHA appraiser must not be listed as terminated or ineligible with Flagstar and may not be listed on Wells Fargo’s ineligible Appraiser List.Updated 04/12/2012, Added 10/11/2011
15. The buyer may not be retaining any other property at the time of closing; the subject property must be
the sole property owned by the buyer at the time of purchase.
Additional Requirements: Property with Sales Price 20% or Greater Since
Seller’s Acquisition of the Property
1. FIMC minimum required 640 credit score requirements apply. The 620-639 exception policy is not eligible in conjunction with this FHA Property Flipping Waiver exception product. Added 08/01/2011
2. Seller must own the property for a minimum of 30 days prior to execution of a resale contract.
3. Loan must be locked directly with Flagstar or Wells Fargo. These are our only two outlets allowing the >=20% FHA Property Flipping Waiver.
4. Two complete FHA appraisals are required. Both appraisals must be requested through Frisco Lender Services, LLC.
·The cost of the second appraisal may NOT be passed on to the borrower but can be covered with seller credit or by the lender.
- If the loan is locked with Flagstar, both assigned FHA appraisers must not be listed as terminated or ineligible with Flagstar.
- If the loan is locked with Wells Fargo, the first assigned appraiser must be registered and currently eligible with Flagstar and FLS must order the second FHA appraisal from RELS as is required by Wells Fargo.
- When you request your appraisals from FLS, indicate Wells Fargo as your first investor selection and Flagstar as your second investor choice. Please be sure to add commentary to the order that it is a property flipping deal so that FLS recognizes the importance of checking Flagstar’s eligible appraiser list and requests the 2nd appraisal from RELS.
5. Both appraisers/appraisals must list upgrades and improvements within the appraisal report and provide photographs of the improvements. The improvements must be reasonable to justify the increased property value since seller acquisition. Additional documentation such as paid receipts, paid invoices, etc. may be required as needed per underwriter’s discretion.
6. If the difference in value between the two appraisals is less or equal to 5%, the higher of the two values may be used and the higher of the two appraisals should be logged in FHA Connection. The lower valued appraisal should NOT be logged in FHA Connection. If by mistake both appraisals are logged in FHA Connection, the lower of the two values will be used.
If the difference in value between the two appraisals is greater than 5%, the lower of the two values must be used and the lower valued appraisal must be logged in FHA Connection. If by mistake both appraisals are logged in FHA Connection, the lower of the two values will be used.
If the difference in value between the two appraisals is greater than 5% and the borrower or branch wishes to dispute the value, field reviews must be requested from FLS for both appraisals. The DE underwriter will make the final value determination upon review of both appraisals and both field reviews.Added 05/10/2012
7. An acceptable home inspection completed by a state-licensed or state-certified (depending on state requirements) Home Inspector must be requested by the Fairway branch office. The assigned inspector must have no interest in the property and no relationship with any of the interested parties to the transaction. The inspector may not receive any compensation for referring or recommending contractors to perform any repairs recommended in the inspection.
The property inspection must be paid for by Fairway and the borrower may reimburse Fairway for the cost of the inspection at the time of closing. This means that the charge for the property inspection must be payable to Fairway on the HUD I.
The branch must complete a check request form and email to firstname.lastname@example.org or call the accounting department at 1-800-953-6352 to arrange for phone payment payable to the inspector.
At a minimum, the inspector must inspect the following:
- The property structure, including foundation, floors, ceilings, walls and roof.
- The exterior, including siding, doors, windows, appurtenant structures such as decks, balconies, walkways, driveways.
- The roofing, plumbing systems, electrical systems, heating and air conditioning systems;
- All interiors; and
- All insulation, ventilation systems, fireplaces and solid fuel-burning appliances.
Any major discrepancies found between review of the two FHA appraisals and home inspection must be explained and documented as necessary.
If the inspection report notes that repairs are required because of structural or health and safety issues, those repairs must be completed and a final inspection must be obtained prior to closing.
8. A copy of the home inspection must be provided to the borrower(s) prior to closing along with the FHA Property Inspection Certification. Borrowers must sign, date and return the form prior to closing as verification that they received their copy of the inspection as required by HUD. The borrower’s acknowledgement as to receipt of the home inspection will be a PTD requirement.
Any loan that does not meet ALL of the above listed requirements is not eligible for the Waiver and is subject to 90-day minimum seller seasoning requirements set forth inMortgagee Letter 2006-14 as well as the requirements listed below.
Seller Ownership 91 - 360 Days Following Acquisition
For non-exempt sellers who do not meet the Waiver requirements listed above, there must be a documented seller ownership period of no less than 90 days at the time the buyer executes an offer on the property or the loan is ineligible for FHA financing.
For purposes of establishing re-sale eligibility, the following must be documented in the loan file:
- Seller’s acquisition date.This is defined as the date the seller legally took title to the property. Acceptable documentation includes any one or more of the following: A property sales history report, copy of the recorded deed, chain of title or certified copy of the seller’s HUD I Settlement Statement from the purchase of the property;
Note that the appraisal should NOT be relied upon as the sole source to validate seller’s acquisition!
- Buyer’s Offer Date. This is defined as the date the borrower first makes an offer to purchase the property. The property purchase/sale agreement must not reference an offer date or buyer signature date prior to 91st after seller’s established property acquisition date;
- Chain of title records. A minimum 12 month chain of title must be reviewed and compared to all other documentation in order to validate the seller’s acquisition date and ownership of the property;
- Matching ownership.The owner of record on appraisal must match the seller in the property sale agreement as well as the current owner on title to the property;
- No assignment of sale contract.The sales agreement must not include mention of plan for assignment of sale to occur. At settlement, property ownership must move directly from the seller to the buyer with no other party in between.
If the resale date is between 91 and 180 days following acquisition by the seller, a second 2055 or 1004 interior/exterior appraisal made by another eligible FHA roster appraiser is required if the resale price is 100 percent or more over the price paid by the seller when the property was acquired. The cost of the second appraisal may not be charged to the homebuyer.
As an example, if a property is resold for $80,000 within six months of the seller’s acquisition of that property for $40,000, a second independent appraisal supporting the $80,000 sales price will be required at the time of underwriting. Even if the seller provides documentation showing the costs and extent of rehabilitation that went into the property resulting in the increased value, a second appraisal is still required for FHA approval.
If the resale date is more than 90 days after the date of acquisition by the seller but before the end of the twelfth month following the date of acquisition, underwriting reserves the right to require additional documentation from the seller to support the resale value if the resale price is 5 percent or greater than the lowest sales price of the property during the preceding 12 months. At the discretion of underwriting, such documentation may include, but is not limited to, an appraisal from another appraiser.