| Thanks to a growing number of crooks getting into the real estate business, at least one major lender is moving to restrict funding of loans for residential properties that have been recently ”flipped” (offered for sale within 90 days of acquisition). Flipping properties for profit is getting a bad rap as a result of these financial bandits. Here’s why.
There is no doubt that mortgage fraud; involving collusion between crooked appraisers, realtors and investors is becoming a growing problem. The FBI logs and investigates what they call “suspicious activity reports” that involve the purchase, refinance and resale of homes that have had their value fraudulently increased through collusion (hired professionals who conspire to create unrealistic values for homes to defraud lenders and homebuyers alike).
The FBI logged in 6,396 reports of suspicious activity in 2003. In 2004, the agency received 17,127 such reports (almost triple the 2003 number).
The losses to both homebuyers suckered into buying properties at inflated prices, and lenders left holding the bag when the loans went into default — have been huge. Many such conspirators have been arrested, convicted, and sentenced to prison terms, but the practice is still growing.
The FHA saw this coming in 2003 (Read more here), and stopped providing mortgage insurance for resale’s that occurred within 90 days. The agency also restricted mortgage insurance to transactions where only the owner of record would qualify as a bona fide seller; not in transactions in which the property had been assigned to others in the original purchase agreement.
For resale transactions carried out between 90 days and one year from the date of investor acquisition, the FHA requires documentation of repairs or upgrades that added value to the property, or an explanation of why the property was purchased at a below market price.
Now U.S. Bank has announced that, as of June 1, 2005, it will no longer fund loans for properties that the seller has held title to for less than 90 days. Real estate and money market professionals expect this policy to spread to other lending institutions in the near future.
What does this mean to us honest and ethical foreclosure investors?
There is another side to property flipping that is both legal and ethical. What us honest investor has to do is avoid getting tarred with the same brush as the crooks.
When we buy a troubled homeowner’s equity at a discount it is because the homeowner is in financial distress and is facing the loss of everything he owns in an impending foreclosure auction. Often, these houses suffer from what Realtors call “Handyman Specials”, so we must put our money and sweat into getting them back in shape to sell at fair market value.
Documentation, as we noted above, is the key here, not only for the necessary repairs and/or improvements that restore its value — but it’s also necessary to document the seller’s financial crisis which caused the owner to sell at a bigger discount than a “market sale”.
Your purchase agreement should include language that includes:
- Seller is aware that Buyer is purchasing property “as is” and for immediate resale.
- Buyer agrees Seller is selling the house “as is” to pay for any damage found by termite, roof, structural, electrical and plumbing inspectors.
- Seller is aware that the Buyers purchase price is below market value.
All of the foregoing is in anticipation of (I have not heard of this happening yet) a lender refusing to fund loans for our home buyers when we try to sell our investments in less than 90 days from when we took title.
It’s unlikely, though, that you will be ready to resell a property in less than 90 days when improvements need to be done. If you take title “subject to” existing financing (as many of our clients do) you’ll probably spend more like 120 days to get everything done (wait for contractor, complete rehab, marketing, selling, funding and closing).
Wherever money and property are involved, we know that we’ll also see sharks in the water. We applaud any steps taken by lenders and/or government agencies to eliminate fraud from real estate transactions.
The bottom line is that we always play be the rules. But we need to know what those rules are, and how to deal with them when they change. I hope this helped… |
