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
“We’ve seen quite a bit of activity in the market on the part of first-time homebuyers,” says Paul Bishop, director of research for the National Association of Realtors. But, he says, many of the options are too “distressed” for many buyers to consider or lenders to finance. “This 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.

“Investors are excited about it, but mortgage companies are hesitant until we know a little bit more,” says John Anderson of Minneapolis-based Twin Oaks Realty.

A green light for investors
San Diego investor Curtis Gabhart is ecstatic about the new rule and says it will definitely boost his investment in Southern California homes.

“We were (flipping) one or two properties a month until January,” he says. “With the new rule, we’ll probably do three to five a month. It increases our yield and decreases our risk.”

James Ward, an Ocala, Fla.-based short-sale negotiator with Crosswind Properties, says he has been getting 20 to 40 calls a week since HUD’s announcement from investors interested in buying and flipping more properties.

“If it works the way everyone is hoping it will, it will be huge,” Ward says.

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, Bishop and many investors argue that was fraud on the part of the few bad seeds. The environment now, they argue, 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.

“I’m surprised that other (government) players are not taking a similar position,” says Ted Akers, managing director of Investor Funding Alternatives, which provides bridge financing to investors.

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.

“It certainly is threatening another write-down in home prices,” says founder and CEO John Burns, 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.

“I don’t know what’s going to happen to prices in six months,” Gabhart says. “If I buy it and sell it in 90 days, I’m not as susceptible to the ups and downs of the market.”

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

“What we’re hoping is that it will all be sorted out by the time the properties are fixed up,” he says.

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.

“Flipping became a bad word,” Anderson said, “but that was a few bad players. Many did real work and really improved the market.”

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