The U.S. Department of Housing and Urban Development (HUD) had previously set up guidelines for house flipping that would prevent people from profiting from Federal Housing Administration (FHA) loans. People they felt were abusing the system were those who would purchase a house and “flip it;” make a few cosmetic repairs and turn around and sell it very quickly. The guideline stipulated an FHA loan would not be used for purchasing homes that had been owned less than 90 days.
This 2003 rule was waived in 2010 in an effort to get many of the vacant homes occupied and off the market. This FHA rule is now being waived again until the end of 2011 and this policy change has received a considerable amount of attention. Many people on both sides of the argument have strong convictions as to why or why not this decision is a good idea.
Pros of the Extension
Neighborhood Improvement: When there are vacant homes in a neighborhood, property values can go down and the overall appeal of an area can suffer. Potential homebuyers do not want to go into an area that seems depressed and has too many homes on the market. The original FHA rule left many homes sitting vacant in neighborhoods.
Investment Opportunities: Not all people who were flipping homes were doing shoddy work, though there were certainly those who would purchase a home, make minor repairs and then sell the property at a significant profit. There were also individuals on the other side who were investing appropriate time and effort into refurbishing a home properly and putting it back on the market. With the waiving of the FHA rule, legitimate home flippers are able to continue their work.
A Buyer’s Market: Buyers now have the option to get affordable FHA loans and buy homes that have been properly renovated. Buyers also have the ability to find an appropriately priced home that is in the right area. Previously, home buyers could not utilize the FHA financing when purchasing these flipped homes since the investors were usually flipping properties in less than 45 days.
Cons of the Extension
No Added Value: The original FHA rule was to prevent people from making nominal improvements and placing a dilapidated home back on the market in the hopes of turning a profit. Small cosmetic changes just cover up any underlying problems until it is too late when the homeowner notices the poor work. There are some honest home flippers out there, but there are still improperly flipped homes being put up for sale.
Buyers Lose Out: When shady home flippers look to purchase a property, they can underbid other offers with cash and close in a matter of a few days; further increasing their profit margin. With the FHA waiver in place, these investors can then sell their poorly rehabbed house to unsuspecting buyers who are able to get the FHA financing.
Only Good for the REO Market: The Real Estate Owned (REO) market is helped due to the rule waiver, but this is not the case for the rest of the market because the low prices flippers pay for homes substantially bottoms out the area market values.
There has been serious discussion on both sides of the debate. It is still unclear as to what effects the current waiver will have on the long term solvency of the housing market. Currently, buyers may be at risk of losing out. Prices can increase and the ideal home may not be in reach. On the other hand, there are more homes being put on the market and communities do not see properties sitting vacant for too long. Unfortunately, it is anybody’s guess as to the lasting implications of this current waiver. After it expires, there may be more negotiation and changes that continue to convolute things. Only time will tell.
Terry Harmon is landscape consultant and works with home flippers regularly. He finds that using dump trucks makes quick work of hauling in and removing materials from the renovations. Sometimes it’s easier to just purchase one rather than paying for rentals, and Terry suggests checking out the used dump trucks for sale at truckertotrucker.com, for seller and buyer listings within the trucker community.
Photo credit: Home rehab by Bradford Noble/flickr
