What is FHA's 90 Day Anti-Flip Rule?

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Question: What is FHA's 90 Day Anti-Flip Rule?

For a number of years now, FHA has enforced a 90 day anti-flipping rule which prevents an investor from reselling a home to a buyer using FHA financing until that have owned the property for at least 90 days.  While some investors might think this is a moot point, since most renovation properties take at least 90 days to rehab and sell, that is certainly not always the case.  There have been numerous occasions in which I have purchased and resold in less than 90 days, because the property was a very LIGHT rehab, or need nearly no renovation whatsoever.

While most deals do involve BOTH a distressed property AND a distressed seller, that is not always the case, and some times the property will need very little to no work.  Just last year, I purchased a home in Pensacola for $50,000 and resold it THE NEXT DAY for $79,900 after spending just $400 to trim the bushes, mulch the beds, and stage the home.  Thankfully I had a cash buyer, but had it been someone using FHA financing, I would have had a LONG wait before I could close and realize my profits.

This "anti-flipping" rule wasn't as big of an obstacle for investors in the past, as FHA financing was a very small part of the overall mortgage market.  However, when the market crashed and banks were reeling, government insured loans through FHA began to take on a much larger share of the market and so it became a bigger issue for those who were looking to flipping to buyers in less than 90 days.

Thankfully, someone at FHA had a massive "A-HA!" moment back in 2010, and they issued a waiver of the anti-flipping rule.  They understood that investors were a huge BENEFIT to the overall real estate market, and that their role of buying distressed home, fixing, and re-selling to strong buyers was a stabilizing force in the market the would help expedite the recovery.  Unfortunately, many of the lenders who were issuing these loans were skittish and uncomfortable with the new rule after numerous threats of "buy-backs", penalties, and fines from the government regulatory agencies, and so they added what are known as "overlays" to the FHA guidelines.  So, they effectively ignored the anti-flipping waiver, and continued to require sellers to be on title for 90 days, sometimes not even allowing a CONTRACT to be written until the 91st day.

Sadly, this social awareness of the necessity of investors in the marketplace, and their benefit as a force to help recycle old dilapidated real estate into good, quality, affordable housing has disappeared from the minds of the powers that be at FHA.  As a result, the decided not to extend the anti-flipping waiver last year, and investors became evil once again on January 1st of 2015, and now have to be punished with an extra long wait to re-sell if they happen to buy a good deal.

(SIDE NOTE: Can you imagine this ever happening in ANY other industry?  A car dealer gets a good deal on a trade-in, and is FORCED to hold it for a period of time before he can sell?  Dollar General buys some close out light bulbs for pennies on the dollar, but has to wait 6 months before they can sell them in stores? Hogwash!)

So, what's the lesson to be learned for active real estate investors?

Number 1 - Multiple offer situations - If you receive multiple offers on a house, you may want to take extra care to review all of the TERMS of the deal, including the type of FINANCING.  Though one offer might be higher in purchase price, if it's an FHA offer that requires you to wait an extra 30-60 days before you can sell, you may end up netting less money due to increased holding costs such as debt service, utilities, insurance, property taxes, etc.

Number 2 - Review Sales Data BEFORE Purchasing or Marketing - As I mentioned in our recent meeting entitled "The Gatekeepers", Realtors have access to data on the MLS that can you provide you with which types of financing are more popular in a certain area, whether cash, conventional, FHA, or VA.  If an area is heavy with FHA buyers, you may decide to market to a different area, or at least be aware of it going in to the project so you can estimate your holding costs accordingly.

What's your experience with FHA buyers and/or the 90 day anti-flipping rule?  Let me know your thoughts below!

J Scott · Answer

First, I'm not missing the point.  If you do a Google search for "FHA  90 day rule," an article I wrote for my website 6 years ago is in the  top 5 search results.  I'm very familiar with rule, and having done 150+  flips at this point, I'm very familiar with the impact it has on  investors.

Your point about "free trade" being "restricted" is  completely off the mark.  First, the term "free trade," refers to  international trade...not domestic.  But regardless...

Nobody is  restricting free markets.  Free markets are based on private businesses  transacting with an agreed upon currency -- in this country, that  currency is typically cash.  Just because the buyer can't get a loan to  buy your goods doesn't mean free markets are being infringed.  If  someone walks into a store, attempts to buy something with his American  Express card, and the transaction is declined, are free markets being  infringed because Amex won't extend credit on the transaction?  If your  buyer tried to get insurance on your house, but insurance companies  refused to provide coverage, are the insurance companies infringing free  market activity?

This is the exact same situation -- the buyer's  lender/insurer is  refusing to lend/insure.  The lender/insurer has every right to  determine -- in the best interest of their bottom line --  which  transactions to lend on/insure and which not to.

Here's another example:

If  you were willing to lend money to someone to make a purchase, but he  decided to make a stupid purchase that you believed would impact his  ability to repay you, would you still allow him to make the purchase.   Or would you say, "I think this purchase is such that it may impact my  likelihood to be repaid...I choose not to loan on this purchase."  Would  you be infringing free market activity by doing so?

Are you saying that a buyer, seller or lender doesn't have the right to refuse to do business with someone based on ownership time, name, eye color or any other arbitrary rule they want (so long as it doesn't violate legally protected classes)?  Are you saying that as a seller, I don't have the right to refuse to sell product to a competitor of mine?  Or someone who has proven to be a difficult customer in the past?

Just yesterday, I had a service provider tell me that he didn't want my business because the job I needed done was too small and wouldn't be profitable for him.  Should I have told him that he can't do that?  Or does every business have the right to underwrite their customers and their deals to determine which to serve and which not to?

As for eliminating 50% of the buyers.  First, FHA accounts for nowhere near a significant percentage of loans these days...but that's unimportant here.  What is important is that it doesn't matter what percentage of buyers are weeded out in any transaction.

Question for you as a seller:

What if a buyer came to you with a contract and based on his financial situation (or whatever) you believed he was unlikely to be able to close the deal.  Would you still accept the contract and lock up the deal for 4-6 weeks in the hopes that he was able to close?  Or would you say, "Sorry, I'm not confident you can perform...I'm going to have to reject the offer."

Assuming you were to reject the offer (as I think you should), what if 50% of your buyers don't seem qualified.  Should you have the right to refuse to sell to 50% of the buyers that come along and want to buy your house?  Or do you believe that you don't have that right, because then you are impacting "supply and demand?"

And assuming you as the seller has the right to choose the deals you'll accept and the deals you'll reject, why does any other party to the transaction (buyer, lender, etc) not have the same rights you do?

Sorry, but your attitude here isn't going to help you be more successful in this business.  Stop complaining about how others (the lenders) handle their business, and focus more on your business.

J Scott · Answer

Those are not reasonable analogies.  In those analogies, the seller is being prohibited from reselling their merchandise for some period of time.  With the FHA rule, the seller is not being prohibited in any way, shape or form.  It is the buyer who is being prohibited from getting a loan to buy your merchandise for some period of time.  If a buyer can find another source of funds, you're welcome to sell to him.

If I were to try to sell a car to someone who wanted to take out an FHA loan to buy my car, and FHA said, "No, we have rules, and our rules prohibit us from financing the purchase of a car," would you say that I'm being prohibited from selling my car because FHA won't finance it?  Of course not.

Now, a better example of the situations above in real estate is the FNMA 90-Day Rule, which prohibits the *seller* from reselling an REO for 90 days after purchase above 120% of the purchase price.

Matt Robinson · Answer

J. Scott, I have also flipped over 150 homes and am doing just fine financially, so while I appreciate your altruistic effort to save me from my "attitude"...trust me, I'm OK.  You are over-analyzing and parsing words from a 2-sentence side note I made in like an 8 or 9 paragraph post...something I was just throwing in as food for thought, not trying to re-write the rules of national and international commerce.

This was intended to only be posted to my Bigger Pockets blog, but apparently my assistant posted it to the general postings or something.  I'm not very active on Bigger Pockets, and really don't know all the rules.  However, since it was posted in a public way, perhaps you felt obligated in some way to correct any inaccuracies so as to protect the unsuspecting public who may be unduly influenced by my poorly worded post.  And I thank you for your heroics.

You are correct, my use of "free market" instead of "free trade" was incorrect.  I don't have hours in the day to sit here on BP, because I'm running my business.  So, I'm sorry again if my 3 minute response wasn't properly researched and well-thought out.  If I could somehow delete this post so as to save you from wasting any further time in your day with my senseless drivel, I would.  But unfortunately, BP doesn't give me the functionality to do so.

My sincerest apologies for any inconvenience I may have caused you or the rest of the Bigger Pockets world.  I will remove the 2-sentence side note from my personal blog in the hopes of not destroying any other lives.  I congratulate you on all of your success in real estate, and wish you much more in the future.

Edwin E. · Answer

Wow.... lets get the gloves out! (I'm just instigating ;)

J Scott · Answer

I didn't take much issue with your first post (it was great other than the point that I called out and commented on)...I more took issue with your second post that implied that businesses that underwrite their transactions are somehow circumventing and infringing on free market activity.

Too many people in this business like to play the victim -- FNMA makes it too hard to make money, FHA makes it too hard to make money, the government makes it too hard to make money, local regulation makes it too hard to make money.  That mentality won't help you grow a successful business.

Real estate (and every business) is about problem solving and taking responsibility for what happens to your business (even when you think you don't have control over it)...

That said, I often don't recognize when I'm being overly critical and hurting someone's feelings.  I apologize if my posts above came off too harshly...that wasn't my intent.

Matt Robinson · Answer

I'm very familiar with Fannie Mae's 90 day rule, since I'm sitting on one right now (day 35) that I could have sold same day if not for the rule.  So, I will concede that the analogy was a poor one (I will delete) but you're kind of missing the overall point, and I disagree that this has no deleterious impact on the seller.  As a free market guy, as most entrepreneurs are, I think it's ridiculous that free trade is restricted in any way, whether it's with real estate short sale purchases, reselling with FHA financing, or health insurance being unable to cross state lines.  I'm ticked off that FHA was more than happy to have investors help bail them and the rest of the country out of its mess, but so quicker to slap the anti-flipping rule back on when it suited them.

Let me fix my analogy...let's say the person who provided 50% of all car loans wouldn't allow a car buyer to buy any car in which the dealer had owned it for less than 90 days, or whose name was Joe, or whose eyes were blue, or whatever arbitrary rule they wanted to implement which has nothing to do with the value of the car if adequately appraised.  That is NOT just a detriment to buyers, but the seller as well.  Your assertion that you can just stroll on over and find a cash buyer (or someone using different financing) might be true, but at what cost?  You and I both know that eliminating 50% (or 40% or 30% or whatever) of buyers will cause downward pressure on prices, thus taking money out of the pockets of sellers.  Simple supply and demand.

What is FHA's 90 Day Anti-Flip Rule?

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