Can Flippers Save the Housing Market?

The term "flipper" became a dirty word in the real-estate business just before the bubble burst. Now the federal government is turning to these quick-turnaround investors to pump some new life into the deflated housing market. 

 

At the beginning of February, the U.S. Department of Housing and Urban Development dropped — for a year — the Federal Housing Administration’s prohibition against insuring a home that had been owned by the seller for fewer than 90 days. 

 

The idea is to “facilitate the return of repaired and habitable properties to the market in a timely fashion,” according to the announcement by HUD, and hopefully to lift real-estate values as these properties are sold. 

 

A boon for the first-time homebuyer
There has been quite a bit of activity in the market on the part of first-time homebuyers. But, many of the options are too “distressed” for many buyers to consider or lenders to finance. The new idea to allow investors the quick turnaround will give them an opportunity to purchase a nice home at a pretty reasonable price. 

 

And given that FHA loans are estimated to account for as many as half of all the loans made to first-time homebuyers, that increases the pool of buyers for flips dramatically. 

 

Of course, just how much of a lift these investors will give is anyone’s guess at this point. And that shot in the arm might be limited if the backlog of homes going through the foreclosure process swells later this year, analysts say. 

 

Will lenders agree?
Moreover, it’s unclear how many lenders will play along with the FHA and make loans for properties flipped in fewer than 90 days.

 

Bank of America, for one, says it was still “assessing the guidelines” and had not made a decision yet about lending on these quick flips.   

 

Wells Fargo says in its “first phase” of its approach, it is “allowing FHA financing for a qualified borrower and property within 90 days of when the seller acquired the home, provided that the purchase price is less than 20% more than what the seller paid for the property.”  It will continue to review the FHA policy and “evaluate the timeline for additional changes.” 

 

In other words, at this point, Wells won’t finance a purchase with a big markup in value that sells in fewer than 90 days from its last sold date. 

 

And industry observers say it may be a hard sell for some smaller banks that were burned several years ago when the market crashed. 

 

A green light for investors
Investors are excited about the new rule and say it will definitely boost investment activity. With the new rule, from an investor standpoint could increase their yield and decrease their risk making more properties available. 

 

HUD initially instituted the 90-day rule because, at the market’s peak, many investors were found to have conspired with appraisers and lenders to artificially inflate values. However, many investors argue that was fraud on the part of the few bad seeds. The environment now, is different. 

 

And HUD has put some conditions on these flips:

All transactions must be arms-length with no “identity of interest” between the buyer and seller or other parties involved. 

 

The property in question must have “no pattern of previous flipping” in the past 12 months.

 

And in cases where the sale price of the property is 20% or more above the seller’s cost — which most of these sales will likely be — the lender must justify the mark-up with documents outlining the renovations, and/or order a second appraisal. Moreover, the lenders must order a property inspection and provide it to the buyer before closing. 

 

Flipping making a comeback
However even without the waiver, flipping is making a comeback, as investors use cash to buy short sales and bank-owned properties. 

 

In Southern California, 3.5% of the homes sold in January had previously changed hands between three weeks and six months prior, according to MDA Dataquick. A year ago, no part of the area had a flipping rate over 2.1%. 

 

Boom-and-bust areas such as Miami and Phoenix also saw significant upticks in December — the last month for which data on these areas were available from Dataquick — as did Clark County, Nev., where Las Vegas is located. Here, flips jumped to 4.2% of all sales in December, up from just 1.7% the year before.

 

No time like the present

Investors can’t say with certainty for how long this new rule will boost their buying. Most are concerned with the so-called “shadow inventory” of homes that are delinquent but not yet foreclosed on. 

 

A new study by John Burns Real Estate Consulting estimates that 5 million houses and condominiums on which mortgages are now delinquent will go through foreclosure, short sale or another process that puts them on the market over the next two years. 

 

The results of this study concedes that findings could threaten another write-down in home prices, especially if the economy does not improve later this year. That threat has investors ready to buy and sell now, while mortgage rates are low and an army of first-time homebuyers is out in force, armed with the government tax credit. 

 

Just two weeks after the FHA waiver was lifted, investor deals are closing and clients hope to have them fixed up and sold within the next couple of months – despite the hesitation on the part of some lenders. 

 

For these and other investors, the FHA waiver also serves as a long-delayed nod to the mostly positive role that investors played in the nation’s housing market over the years.

 

MSN Real Estate