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The 90-day FHA flip rule has caused me delays on a few flips this year. The rule basically says that FHA financing is not allowed on a house for new buyers that was purchased fewer than 91 days ago by the current owner. If you buy a house, fix it up, and try to sell it to FHA buyers, you will have to wait until you have owned the house for 90 days before you can even accept a contract from those buyers. There are some exceptions for certain sellers—like banks and builders—but for flippers, it is almost impossible to get around this rule.
What exactly does the FHA 90-day flip rule say?
It used to be that the buyer could order a second appraisal to bypass the FHA 90-day flip rule, but that changed in 2014. If you are selling a flip that has a huge difference from your buying price and the selling price (close to double), you still may have to order a second appraisal, even after the 90 days.
Exceptions to FHA property flipping restrictions are made for:
- Properties acquired by an employer or relocation agency in connection with the relocation of an employee.
- Resales by HUD under its real estate owned (REO) program.
- Sales by other U.S. government agencies of Single-Family Properties pursuant to programs operated by these agencies.
- Sales of properties by nonprofits approved to purchase HUD-owned Single Family properties at a discount with resale restrictions.
- Sales of properties that are acquired by the seller by inheritance.
- Sales of properties by state and federally chartered financial institutions and Government-Sponsored Enterprises (GSE).
- Sales of properties by local and state government agencies.
- Sales of properties within Presidentially Declared Major Disaster Areas (PDMDA) only upon issuance of a notice of an exception from HUD.
- The restrictions listed above and those in 24 CFR 203.37a do not apply to a builder selling a newly built house or building a house for a borrower planning to use FHA-insured financing.
How do you handle an FHA contract that comes in before you have owned a property for 90 days?
I sold a flip earlier this year on which we actually got a contract before I had owned it 90 days. I have had up to 22 flips going at one time this year, and it is rare that I get a house repaired fast enough to list it for sale before I have owned it 90 days. However, I bought this house from my direct marketing campaign, and it did not need much work, which allowed me to get it fixed quickly. Here were the numbers on the house:
- Purchased for $120,000
- Repairs were about $20,000
- Carrying costs were about $12,500
- Buyer closing costs of $3,000
- Selling price of $213,000
- Total profit of about $57,500
This was one of my best flips of the year, especially considering I made this much on a low-priced property. I actually thought it would sell for a lot less when I bought it, but our market has been tremendous this year. We did run into some hiccups on this property because of the 90-day flip rule. I bought it on July 28th and listed it on September 22nd. We listed it for $199,900 and immediately received a $210,000 offer. I was ecstatic until the buyers’ lender said they could not close on the house because of the 90-day flip rule. They were hoping to close in October, but because of the flip rule, it would actually have to close in December. That was a long time to wait, but it was a great offer, so I went forward with the deal.
The 90-day flip rule does not state that you cannot buy a house prior to the 90 days but rather that the entire loan process cannot start prior to the 90 days. Technically we are not supposed to write the purchase contract until the 90 days have passed. What we did was write a contract between the buyers and sellers, and then we wrote a brand new contract when the 90 days passed. At that point, the appraisal, underwriting, and loan approval can begin. Luckily, the appraisal came in at value, and we closed on December 11th.
Are there other ways to get around the 90-day flip rule?
There are some ways to get around the 90-day flip rule, including dumb luck. I sold a house earlier in the year to an FHA buyer who wrote the contract before I had owned the house 90 days. I used this sale as a reason for the lender why we should not have to wait the 90 days on the property I discussed in this article. The lenders’ response was the underwriter and lender must have both forgotten about the 90-day flip rule on that deal. There is no way it should have been under contract or sold before the 90 days, even with a 2nd appraisal. I got lucky on that property. You can also try to find a buyer that does not need to use FHA. Often, a conventional mortgage is actually better for buyers, but they need to have better credit and debt-to-income ratios to qualify for conventional. Most of our buyers use FHA loans, and they are willing to pay the most for our flips, so it makes sense to cater to them.
I usually do not have to worry about the 90-day flip rule because it takes me longer than that to get my houses ready to sell. It can be a thorn in an investor’s side when they are counting on a house selling quickly and they have to wait a month or two longer. Investors also need to be aware they may need a second appraisal with FHA loans if they try to sell a house for twice what they bought it for. Conventional mortgages do not always eliminate these problems either as many conventional lenders adopt FHA rules.