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'Anti-flipping' rules can hurt investors

It's getting harder for some residential property investors to "give a flip" these days about good deals, thanks to stricter lending rules on homes that are bought and quickly resold.

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In mid 2003, the Federal Housing Administration (FHA) tightened restrictions on re-sales occurring within 180 days and stopped insuring mortgages altogether on property sold more than once in 90 days. Since then, other lenders have followed suit, toughening underwriting standards for "quick-turns," more commonly known as "flips."

Many investors say the move was an overreaction and is clogging up the re-sale pipeline, unfairly impacting small entrepreneurs who can't afford to tie up their assets for months at a time, and giving homeowners who need to exit their homes quickly a smaller universe of potential buyers.

"There has been fallout from this," says Bob Johnson, editor of the newsletter, Rehab Central, and managing director of Frederick, Md.-based Shiloh Renovations. "The majority of rehabbers are dealing in low-income, blue-collar areas, and buyers of these houses are going to want to buy with FHA-guaranteed financing. That's where they (investors) are hitting the wall."

The 90-day rule can also reduce the price that can be bid at a foreclosure sale by honest real estate investors, says Norman Linton, principal of mortgage-investments.com, a marketplace for seller-financed notes traded between loan originators and smaller home investors. "The rule really creates a drag on the marketplace," he says. Linton says he knows a number of legitimate investors who are unable to sell properties they bought because the buyers can't get financing.

Linton recalls one recent instance when an investor bought a poorly maintained foreclosed property for $49,000 that was assessed for $85,000. The new owner thoroughly renovated it, investing thousands, and placed it on the market for $110,000, following an objective appraisal for $120,000. A non-HUD lender denied a prospective buyer's loan, "even though it was being turned around for fair-market value," Linton says. Three months later, the house was sold at auction. Its price: $120,000.

Fraud fighters
Proponents of the tightening of the resale provisions say they're needed to combat mortgage fraud, which has run rampant over the past decade, according to the Department of Housing and Urban Development (HUD), which administers FHA insurance programs.

Here's how it happens: A property is sold and a minimal amount of rehab work is done. The owner somehow gets an exaggerated statement of value from an unethical appraiser and then sells the property at a price that far exceeds fair-market value to an unsuspecting homebuyer. If the buyer can't make the payments, the lender is stuck with a big loss.

 
 
-- Posted: May 16, 2005
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