New FHA seasoning rules
At the end of last week a new waiver was announced regarding the 90 seasoning requirement on FHA loans. Since then, every lender has been shouting this from the rooftops to get the word out. I think it is a good thing, but also wonder who this will really benefit. In a way it will benefit us all, but mostly it will benefit the people that have the money to invest.
First, for those of you who don't know what the seasoniing rules are, FHA previously would not underwrite a new loan if the property has changed hands within the prior 90 days. As of Feb.1 that rule will be waived for one year.
In most cases, the flippers are purchasing their properties directly at foreclosure sales. In the current market, that is the best way to get the most spread. Purchasing from the lender after foreclosure typically doesn't provide enough spread to make money, as the typical end buyer is looking at the comps including foreclosed and other distressed properties. Most flippers do some fix up, and market the properties at higher prices than unfixed foreclosures. Many buyers don't have the funds to do fix up, so these properties may be attractive to people in that situation. It is easier to get a higher loan (if qualified) than lay out money out of pocket for the re-hab.
There are some guidelines on the waiver including:
All transactions must be arms length (no identity of interest between parties involved in the transaction).
No patterns of previous flipping activity as evidenced by multiple title transfers within a 12-month time frame.
If the sales price of the property is 20 percent or more over and above the seller’s acquisition cost the waiver will only apply under certain conditions that must be verified by the lender.
The last of these is probably most important in terms of how will the market be affected. When somebody flips, they will invest additional funds in fixing it up and then mark it up for the profit. A seller may be eligible for exceptions to the 20% rule if they show sufficient legitimate repairs have been made. It many cases though, the seller's have bought it significantly below market, so putting it on the market under the 20% rule may not be appealing to them.
So who does this benefit. The stated goal of this waiver is to speed up transactions to FHA buyers. I do see this occuring, as I have a few buyers that had to rule out properties due to the seasoning requirements. I believe it will benefit the investors more, as they have less holding costs and can turn around and keep flipping. We will probably see more people flipping considering that they don't have to factor in 90 days of holding costs, thereby increasing profits. In the long run, it may help inventory levels at a time when we are anticipating more foreclosures hitting the markets. The timing may be right. We have seen many well intentioned policies that haven't had the intended effect, so only time will tell on this, but I believe the overall intent is good.
Adam Tarr PC
Citywide Real Estate
Phoenix, AZ
adam@weareazrealestate.com