FHA 90 Day Rule – Fix and Flip Guidelines

As a fix and flip investor, you need to be aware of laws and regulations that affect your costs.  The FHA 90 day rule is one such law.  Originally enacted to prevent “flippers” from purchasing properties and artificially inflating the value via collusion with a lender or appraiser, this rule affects how long you must hold a property before reselling it to a FHA buyer.

The Basics

The law states that you have to hold a property for 90 days before it can be resold.  This does not mean you cannot finish the rehab, market the house, and negotiate a contract in less time.  In fact, this should absolutely be the goal of every fix and flip investor.

**Note that this does not apply to buyers who use conventional financing or cash.

Current  Guidelines

The rule was waived in 2010 and the waiver has been extended until December 31, 2012 in an attempt to help stabilize the real estate market.  However, some safeguards are still in place

1)       All transactions must be arms-length.

2)       If the property has been owned for less than 180 days and the sale price is greater than 120% of the original purchase price, the lender must do extra due diligence to ensure the value of the home.

Additionally, many banks have overlays (additional restrictions) that prevent sales within 90 days despite the relaxed government guidelines.  In fact, most overlays now prevent any portion of the loan process from starting prior to day 91.  (At one time, the buyer could initiate the loan process, rewrite the contract on day 91 and close on day 92).

What to do about it

The FHA 90 day rule is simply one of the rules of the game.  By properly planning and budgeting, you can minimize or eliminate the effects on your business. Here are our recommendations

1)       Plan on a minimum hold time of 90 days+30 days to close.  (When budgeting carrying costs, we actually recommend 6 months)

2)       Plan on having to pay for a 2^nd appraisal.  This is part of the due diligence requirements mentioned above.  The buyer cannot pay for this.

3)       Check with local banks and mortgage brokers.  Some do not have these overlay requirements in place.  It may be worth offering an incentive to the buyer to close with the mortgage company of your choice in order to get the house sold.

4)       Make sure the buyer’s agent and buyer are aware of the potential for a delayed closing when the rule applies.  It won’t be an issue as long as they aren’t surprised a week before closing.

Erik Hitzelberger has been Real Estate Investor since 2007. While learning the ropes in the market down-cycle, he now teaches others how to use his systems and leverage other people’s expertise to achieve their own goals.

Erik Hitzelberger – who has written 194 posts on Part Time REI.

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