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House flipping has been the subject of numerous reality TV shows. Real estate investors would make quick cash by buying homes low, fixing them up and selling them for a substantial profit. Sounds pretty easy – right?
These shows do not mention, how hard it is for Columbus home buyers to finance a purchase, especially if it involves a flip.
As the real estate market was heating up a few years ago, FHA implemented anti-flipping rules. Basically, they state that you cannot resell a house you purchased less than 90 days ago. The goal was to curb “illegal” flipping of homes for sale and therefore limit mortgage fraud.
The law was intended to control real estate investors who would buy HUD homes and REO’s cheap, fix them up quickly and sell them for a profit. As is the case with so many government regulations, this law had an unintended effect on home foreclosures. Banks that foreclosed on homes could not resell these homes for 3 months, which resulted in a huge inventory of REOs on the lenders’ books.
With the housing market slumping our government decided to waive the anti-flipping rule for a year in 2010. Just a week ago FHA announced that the anti-flipping rules would be waived for another year.
How will this affect you?
First of all, it will only affect you, if you need an FHA loan to finance your purchase. However, many banks have implemented similar rules for all of their loans.
Second, the waiver only permits the resale of homes in less than 90 days, if they price difference between purchase and resale is less than 20%.
Now that’s a bummer.
If you ever sold a home you know that the total sales cost can easily exceed 12% of the sales price. Usually, you pay 6% for real estate commissions, 1.5% for sellers closing costs and in most cases you have to give buyers a 3% concession to pay for most of their closing costs.
The potential flipping profit between buy and sell is less than 10%. I don’t know a business person who would do a transactions for such a low margin, considering the extensive risk involved in rehabbing Columbus homes.
Now let’s talk about these rules affect home buyers.
Although the anti-flipping rules targets investors, they have serious consequences for home buyers, as well.
As an innocent buyer you may end up signing a contract on a home the seller purchased less than 90 days ago. The seller does not have to disclose when they purchased the home. So you have no way of knowing, whether a specific home falls under the anti-flipping rule. You will only find out after the appraisal is complete or, if your Columbus real estate agent asks the right questions and checks the public records.
Even, if your purchase would fall under the “waiver”, the difference between your contract price and the seller’s acquisition price may exceed 20%, in which case you won’t get your loan approved.
How can you protect yourself against falling victim to these regulations?
How can you avoid finding out in the last minute that your home purchase won’t get approved, after you already spent hundreds of dollars for the appraisal and home inspection fees?
Your Columbus real estate agent needs to investigate the property before you sign the contract and apply for the loan. Here are the 3 questions that must get answered answered:
- How long ago did the seller buy the property?
- What was the purchase price?
- What’s the value of the improvements made and are they documented?
You can find answers to the first 2 questions by checking the county auditor’s real estate section. Transfer date and sales price are public record. The 3rd question can only be answered by the seller, who may be reluctant to release the exact numbers.
Thanks for reading the susannenovak.com Blog!
Posted by: Susanne Novak, ABR, FIS, GRI
Columbus Real Estate Agent helping First Time Buyers.
(614) 975-9650