FHA Condo Arbitrage

[Jonathan Bombaci]

So there is word going around that the FHA is changing their UW guidelines for condos starting in October. Currently in order to get an FHA loan on a condo the whole association needs to be approved by FHA. The condo's for sale in associations that are not FHA approved, or unable to get FHA approval, tend to sit on the market longer and sell for significantly less than their FHA approved counterparts. It's simple supply and demand, the supply is the same, a 2 bedroom condo is a 2 bedroom condo but the demand is different since not everyone can get financing on a non FHA approved association. And from my experience even those can go conventional worry about marketability when they go to sell or just may not want to put more than the 3.5% down for various reasons.

However, Starting in October FHA is changing their guidelines so they will be able to just approve the singular unit for FHA financing without dealing with the whole association. So what I'm wondering is if someone were to go out over the next few months and scoop up a bunch of the condos that are sitting on the market that can't get FHA financing today, rent them out for positive cash flow and then sell them as FHA approved units in 6 months would that work?

Just to give perspective, a FHA approved 2 bedroom condo in the area I am looking sells for ~$200k, their unapproved counterparts ~$170k (15-20% difference). The plan would be to offer $150k (less repairs) on a bunch of them and try to scoop up a few that would generate at least $150 cashflow if rented out. Doing a transaction like this for just 1 door wouldn't normally excite me but the potential upside in such a short period of time with very little work makes this much more attractive to me.

Am I missing something? Will this not work for some reason that I am missing?