Investors – Understanding the 90 Day Restrictions for Foreclosures
As many investors are aware, the FHA flipping waiver expired at 12/31/2014. Going forward, there is a 90 day waiting period for homes to be eligible for FHA financing. Sellers will have to wait until the 91st day in order for buyers to be able to use FHA financing to purchase. Buyer contracts must generally not be executed prior to the 91st day if FHA financing is needed. Since FHA borrowers comprise a significant portion of the potential target market for these investment property rehabs, this is an important change. Note that sellers and buyers should further be aware that within 12 months of the initial investor purchase, there are also guidelines related to second appraisals and/or appraisal reviews depending upon the timeline and amount of resale in regard to initial purchase price. The FHA flipping rule change relates strictly to the use of FHA financing to purchase resale.
Fannie Mae and Freddie Mac foreclosures also have a 90 day rule. The rule for Fannie Mae and Freddie Mac is actually a deed restriction. It prevents the resale of the foreclosure for more than 20% of the initial purchase price within 90 days. Since this is a deed restriction, the 20% limit is in place regardless of whether property has transferred. The second buyer is also tied to the initial 90 day restriction. After the 90 days, there is no restriction on resale value. However, like the rule for FHA, there may be bank guidelines for properties resold within 12 months.
The Fannie Mae deed restriction also says that you can’t “encumber” the purchased property for more than 20% above the purchase price for 90 days either. In other words, if you purchase the property for $50,000, you would not be allowed to get a loan against the property for more than $60,000 for at least 90 days. This can certainly impact investors who get “rehab loans” that provide both the purchase funds and the rehab funds, as it wouldn’t allow the total loan to be more than 20% above the actual purchase price.
The discussion of these rules serve to emphasize the need for investors to have an exit strategy in place. They should understand the various things that may impact your “flip” like holding costs and time, marketability, rehab financing, etc.
If you are an investor looking to buy or sell in the Chicago area, please contact me.