When purchasing properties in the current economic environment, you need to be aware of certain governmental and financial institution regulations regarding the resale of the property.  We all know that lenders have used “seasoning requirements” for several years to weed out the fraudulent “flip” transaction.  However, there are rules you must be aware of if purchasing an REO property from FannieMae and/or selling to a purchaser who intends to obtain FHA financing.

FannieMae

If you are purchasing REO properties from FannieMae, read your contract carefully.  Your resale of the property may be restricted for up to 180 days from the date of closing.  FannieMae is requiring the following language to be contained in both their contracts of sale and the Deeds of Conveyance.

“Grantee herein shall be prohibited from conveying captioned property to a bona fide
purchaser for value for a sales price of greater than ($_______= up to 120% of sales price) for
a period of [up to one hundred and eighty (180)] days from the date of this deed. Grantee shall
also be prohibited from encumbering subject property with a security interest in the
amount greater than ($_______= up to 120% of sales price) for a period of [up to one hundred and eighty (180)] days from the date of this deed. These restrictions shall run with the land
and are not personal to grantee.”

The purpose of this language is to prevent investors from “low-balling” the price they offer to FannieMae for the property and then re-selling the property at a much higher price, with simple cosmetic repairs.  They are concerned about being defrauded into selling the property for less than it is worth, buyers being defrauded into buying the property for more than it is worth and lenders being defrauded into loaning money on a property that does not support the value of the loan.  Unfortunately, this impairs the honest investor, who legitimately upgrades the property and its value, from being able to re-sell the property in less than 6 months.

FHA Anti-Flip Rule

FHA will not insure a loan where the property is being re-sold within 90 days of the Seller’s acquisition of the property.  The language in the Rule is somewhat ambiguous and some lenders are interpreting this to mean that the Contract of Sale cannot be signed within the 90 day period.  However, most lenders are interpreting this to mean that the closing on the FHA purchase cannot occur within the 90 day period.  If the re-sale occurs within 91-180 days of the Seller’s acquisition, the lender is required to document the re-sale value if the Seller is selling for at least 100% more than he/she paid for the property.  This documentation can be either an additional appraisal performed on the property or documentation of the Seller’s rehabilitation efforts on the property.  For properties re-sold within 91 days to 1 year, FHA may require the lender to provide additional documentation on value if HUD has determined that the property is located in an area where “flipping” is a problem.