On Friday, January 15, 2010, HUD Secretary Shaun Donovan issued a press release, as part of HUD’s Neighborhood Stabilization initiative, temporarily waiving FHA’s 90 Day Seasoning Rule. Amazingly, HUD is cognizant that the seasoning guideline is having a negative impact on alleviating the problem of abandoned and blighted homes:
“In today’s market, FHA research finds that acquiring, rehabilitating and the reselling these properties to prospective homeowners often takes less than 90 days. Prohibiting the use of FHA mortgage insurance for a subsequent resale within 90 days of acquisition adversely impacts the willingness of sellers to allow contracts from potential FHA buyers because they must consider holding costs and the risk of vandalism associated with allowing a property to sit vacant over a 90-day period of time.”
The online real estate community was buzzing yesterday as news of this waiver spread quickly. The investor “gurus” are, of course, rejoicing and spreading the news far and wide, without a careful read of the Waiver itself. The intent of this temporary policy change is to allow investors to take title to a property, rehab it and sell it quickly. It is not a panacea for those investors who pick up a property at a discount, seeking to flip it for a profit in a “back to back” or “double” closing. For those types of transactions, the 90 day seasoning rule is a non-issue if you utilize a land trust correctly.
HUD’s Mortgagee Letter 2006-14 clarified the Rule and Regulations set forth in 24 CFR 203.37a concerning the eligibility of properties for FHA insurance and the rules governing sales of property. As I have discussed in a previous blog post, Legal Analysis of FHA’s Seasoning Requirements, the real estate and mortgage industry routinely misunderstands and applies these eligibility rules incorrectly and it appears that the trend is continuing with this new Waiver.
FAQS:
1. Does it have to be a property acquired through a short sale, bank auction or an REO to be eligible under the Waiver?
No. There are no requirements in the Waiver concerning the status of the property itself. It is not necessary to demonstrate the distressed nature of the property.
2. So I can get a property under contract, execute a contract with a potential FHA buyer and close with my FHA buyer the same day or the day after I purchase the property?
No this transaction would not be eligible for FHA insurance. The waiver is actually of the requirement that the real estate contract be executed on the 91st day after the investor takes title to the property. The requirement that the investor own the property is still in effect and therefore Contract Vendees and Assignments of contract are still prohibited. Further, an application for an FHA mortgage cannot be submitted to a Lender for consideration without a fully executed Contract. Therefore, Back to Back Closings will be impossible.
3. So I can close a week after I take title?
Virtually impossible for several reasons. I venture that there are almost no Lenders in this post-bubble market that will take an application for an FHA mortgage and be in a position to close a week later. I am going to stretch that to probably 30 days. This is definite if your sale price to your FHA buyer is 20% or more higher than your acquisition price (do the math – its not that hard to hit that number – especially in certain areas of the country where housing prices are below $50,000). If the sale price exceeds the 20% threshhold, the investor will have to document the increase in value with supporting documentation and/or a second appraisal and the Lender will have to obtain a Property Inspection Report (see paragraph 2 of the Waiver). This report will not be ordered prior to application submittal and as discussed previously, that doesn’t take place until there is a fully executed Contract of Sale.
4. I found this great property that my buddy picked up 2 months ago for $120,000.00. He rehabbed it and I am in contract to purchase it from him for $220,000. I want to flip it to an FHA buyer for $250,000.00 can I do it?
You will have to wait until the 91st day after you close title to enter into a Contract of Sale with the FHA buyer. The Waiver will not apply if there is a history of prior flipping activity in the 12 month chain of title (see paragraph 1(c) of the Waiver).
5. In April, the Treasury’s Short Sale Program goes into effect and there should be a lot of distressed properties coming on to the market. The Waiver is going to be a big help in moving those properties!
No, it isn’t. Apparently, government offices do not communicate with each other before issuing rulings – one of the requirements under the Treasury short sale program is that the Contract include a representation that the Purchaser will hold the property for 90 days post-closing. Perhaps the Treasury will revise its Directive and remove this offending language (which, as I had discussed previously, is extremely short-sighted).
Conclusion
Investors should rejoice as finally they are receiving the recognition they deserve: properties are moving because of their hard work and without the proper incentive, it wouldn’t happen. Instead of being the black sheep of the real estate community, investors are a major part of the solution. This Waiver is what investors need to get the properties rehabbed, sold and occupied to ameliorate the problem of abandoned and blighted homes. It is not a license to flip and should you wish to engage in that type of activity, you will not be able to use this Waiver to accomplish your goals.
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