'Anti-flipping' rules can hurt investors and buyers
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There are a few exceptions. FHA-insured mortgages are still available if the house to be resold was taken back by HUD, and on properties bought by a relocation company or employer for use by workers.

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Other stipulations of the so-called "anti-flipping" regulations are aimed primarily at quick resale of new homes. They state that only the owner of record may sell to a person obtaining FHA mortgage insurance for the loan. In other words, the arrangement can't involve the sale or assignment of a sales contract on a property. If a resale does occur between 91 and 180 days, the lender can be forced to obtain a second appraisal based on a resale threshold percentage established by the FHA. For example, if the home price rose by more than 50 percent within a five-month period, the FHA could ask for the new, independent appraisal.

Let's say a home under construction is sold at $250,000. But by the time the home is completed and the sale consummated, the would-be buyer recognizes that the demand is such that he can sell or assign the contract and make a huge profit. This "flip" could be blocked by the new regulations. HUD also requires that the owner document the condition of the property when it was bought and the work that was done to the property since.

Those thresholds, and the 90-day turnaround rule, are strict enough to deter unscrupulous sellers, lenders and appraisers from inflating value, but high enough not to deter legitimate rehab efforts.

There's no hard-and-fast data yet suggesting the rule has stalled the renovation industry. Remodeling expenditures by homeowners and rental-property owners accounted for more than 2 percent of the U.S. economy in 2003, totaling $233 billion, up from $214 million in 2001, according to the Harvard Joint Center for Housing Studies' 2005 report, "The Changing Structure of the Home Remodeling Industry."

Tim Doyle, director of government affairs for the Mortgage Bankers Association, says his organization is asking HUD for additional exceptions to the 90-day rule and believes there's a good chance they'll be forthcoming in the near future. "The owner-of-record rule is a sensible one, but the 90-day rule is a little severe," he says.

Even hurts lenders
Although government-sponsored lenders are now exempt from it, the REO departments that dispose of foreclosed real estate in federally chartered banks can't even move properties within the 90-day range, Doyle says. "Some (banks) may not take title until the end of the whole foreclosure process, which can take a year, and then they have to wait 90 more days.Meanwhile, that's not helping the neighborhood where the house is located."

Also negatively impacted by the 90-day rule are not-for-profits, urban renewal organizations, people who have inherited or been given properties, or people who must move quickly due to an emergency or job change, Doyle says.

Still, there are several ways around the HUD 90-day rules for investors:

• The owner can provide seller financing on the property.
• The investor/owner can find a buyer who will consent to a six-month lease-option deal on the property, and the sale can be conducted at option time.
• The cost of the 90- or 180-day holding period can be built into the eventual selling price.
• The owner can sell to a buyer who qualifies for a non-conforming loan.

However, Bob Armbruster, president of the National Association of Mortgage Brokers, says many unconventional lenders are adopting tenets of the rule. "Non-conforming and sub-prime lenders are becoming more and more aware of risk management and they are reflecting it in their underwriting policies."

Armbruster noted that there's "no doubt that you have some very legitimate rehabbers who are being victimized as a result of this crackdown." But fraud, revolving primarily around inflated appraisals, "continues to be a problem throughout the U.S."

Critics say the problems could have just as easily been addressed by imposing a six-month holding period on properties where a seller's price is a set percentage more than his acquisition cost.

Media headlines saying HUD had banned property flipping have been deceptive, say rehabbers. The simple act of buying a home, rehabbing it and reselling it for a quick profit "is not illegal, nor has it ever been," says Johnson. "It's called wholesaling. You buy at a low price and sell it for a little more. It's like tennis shoes or any other product."

In comments to HUD, the National Association of Realtors has said many legitimate rehab projects require less than three months to complete, and that the rule subjects distressed properties to continued deterioration because it deters investors from sprucing up the country's housing inventory.

"Rehabbers take unsafe houses and make them safe," says investor Johnson. "They keep neighborhoods from falling into blight by fostering homeownership and civic pride. Once neighborhoods reach 60 to 70-percent rental, the neighborhood goes to hell."