Wynn at Law LLC has noticed a recent resurgence of real
estate 'flipping.' Late-night cable and radio stations are again saturated with
ads touting the wild income potential of acquiring and liquidating the same
piece of property within the shortest possible time frame. Flipping is legal –
as long as it's done on the up and up.
Before the housing collapse a decade ago, some curbs were
put in place to deter flipping. The FHA sets the rules by which most lenders
follow: Having 3.5 percent as a down payment for example. In 2005, the FHA
required additional inspections and safeguards taken on mortgages applied for
on properties that have been owned for less than 180 days, and outright
forbidding the approval of mortgages on properties owned for less than 90 days.
Those rules were relaxed in 2010 following the real estate market bust wiping
out $7 trillion in property value.
More importantly, that lost value represented the largest
investment loss for many families… and did not involve as many people flipping
houses. With that in mind, most lenders still adhere to the 90-day guideline.
If you're buying a flipped home, there are still numerous
loopholes and unregulated areas that an unethical or inattentive flipper can
exploit when flipping a house. It still remains up to the buyer and his or her
attorney to perform all the necessary due diligence before buying. If the
property is to be purchased with an FHA-backed loan, a flipped home may require
more time to purchase because of the additional documentation required of the
seller.
If you're interested in flipping, avoid the late-night
infomercials blaring about how you can flip a home without putting in a dime of
your own. Banks have extremely tight restrictions to watch for fraud. It's best
to have cash on hand for this highly speculative form of investment: Cash
you're able to part with (and potentially not recoup) for at least 90 days. A
quickly-flipped home requires documentation on renovations, as well as
additional appraisals, to justify a much higher resale price if the deal
involves an FHA-insured loan. The average flipping time from purchase to resale
is just over 106 days, according to market monitor RealtyTrac. Know this as
well: Some properties have to become
rentals before the flipper is able to get from the market what he or she thinks
is the 'value' of the property. Are you prepared, legally, to become a
landlord?
In the case of flipping, it's the old adage at play whether
you're buying a flipped home or flipping one yourself… If it sounds too good to
be true, it probably is. Get an attorney.
*The content and
material in this original post is for informational purposes only and does not
constitute legal advice.
Photo by Victor Zastolskiy, used with permission.
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