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HUD Curtails Property Flipping

by Mel Metts

In 2003, the Department of Housing and Urban Development (HUD) established rules to prohibit certain types of property flipping, when the sale was to be financed by an FHA mortgage loan. The rules apply only to buyers seeking FHA financing. Although the rules refer to single-family homes, it is reasonable to assume they would apply to multiunit properties as well.

The reason for the new rules is to prevent the practice of reselling recently-acquired property for a considerable profit with an artificially inflated value. HUD says this practice is often abetted by a lender’s collusion with the appraiser.

1. Owner of Record. To be eligible for a mortgage insured by FHA, the property must be purchased from the owner of record and the transaction may not involve any sale or assignment of the sales contract.

2. Sale occurring 90 days or less following acquisition is prohibited. If the re-sale date is 90 days or less following the date of acquisition by the seller, the property is not eligible for a mortgage to be insured by FHA.

3. Sales occurring 91-180 days following acquisition. If the re-sale date is between 91 days and 180 days following acquisition by the seller, the property is generally eligible for a mortgage insured by FHA.

Two appraisals. However, HUD will require that the lender obtain additional documentation if the re-sale price is 100% over the purchase price. Such documentation must include an appraisal from a second appraiser. The lender may also require documentation of the rehabilitation that was performed on the property.

4. Sales occurring between 91 days and 12 months following acquisition. If the re-sale date is more than 90 days after the date of acquisition by the seller, but before the end of the twelfth month after the date of acquisition, the property is eligible for a mortgage to be insured by FHA. The lender may require additional documentation to support the re-sale price in certain circumstances, however.

1. HUD-owned properties are exempt from these restrictions.

2. Properties purchased by an employer or relocation agency in connection with the relocation of an employee are also exempt.

Several years ago, I acquired control of a single-family home under a lease-option agreement. During the term of the lease, the seller/landlord remains Owner of Record. Under the new HUD rules, I cannot sell the house to an FHA buyer, because I am not the Owner of Record. To qualify for a sale to an FHA buyer, I must exercise my purchase option and hold the property for a minimum of 90 days.

While the HUD rules apply only to residential property purchases covered by FHA-insured mortgages, it is safe to assume that all lenders will apply strict scrutiny to flips.

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Last modified: May 13, 2008