Considering a house flipping project? The premise itself is simple: purchase a home, make any necessary upgrades, and then quickly resell the property for a profit. With the housing marketing booming right now, coupled with the popularity of real estate TV programs, many people are thinking about their own house flipping project. But, as with any investment, there are some inherent risks. Flipping a house is not a foolproof investment – there are restrictions and laws in place that Do-It-Yourself’ers should be aware of.
Federal Housing Administration Reselling Restrictions
The Federal Housing Administration (FHA) is one of the largest mortgage insurers in the world; it insures many of the mortgages in the US. The FHA provides insurance on loans made to approved lenders and also places restrictions on the mortgages it will insure. Known as the Anti-Flipping Rule, the FHA limits the frequency with which a house can be purchased and re-sold. FHA mortgage borrowers cannot purchase a home that the seller has owned for less than 90-days. The policy is designed to prevent predatory property flips and avoid mortgage fraud. So, if your plan is to flip a house quickly, make sure you take this rule into account when you are working with your buyer.
Mortgage Loan Fraud
When it comes to purchasing a house, many people cannot afford to pay cash for a property. They use banks and lenders to help finance the purchase. It’s common to have one person taking out a mortgage to purchase (and flip) a house, and then a second person taking out a mortgage to purchase that flipped property. This situation can lead to mortgage fraud. Here’s one example. Let’s say purchaser #1 buys a run-down property with a reduced-rate mortgage or little money down, and then colludes with purchaser #2 to pay off the first loan and increase the home’s value. When purchaser #3 buys the property, they are left with substandard renovations and an artificially inflated purchase price. This is mortgage fraud. Or, let’s say purchaser #1 and purchaser #2 cannot find a buyer for their property, so they default on the mortgage and keep the proceeds from the inflated second mortgage. This is also mortgage fraud.
Mortgaging requirements have become much more strict for short-term owners. Borrowers should be truthful with their lenders when they’re taking out a mortgage – and, accordingly, lenders should also be straightforward. Buyers should beware of No Money Down loans and be on the lookout for home equity scams.
House flippers make money by selling a property for more than they purchased it. The bigger the price differential, the more money they make. That’s why you’ll see house flippers focusing on foreclosed properties or more dilapidated houses. But when a homeowner has fallen on hard times, and the bank or lender has stepped in, it can be unclear who actually owns the house. Clearing the title to a house can be expensive and time-consuming. It might even make the house flip a financial loss for the investor. For this reason, many house flippers purchase title insurance, which helps verify that they are acquiring clear title to the property for purchasing and reselling purposes.
Have Questions? Contact Brian M. Douglas & Associates
While house flipping can be an exciting and profitable project, it’s important to protect your finances and investments. One way to do that is to learn about the laws and regulations in place concerning the purchasing, mortgaging, and resale of a property. If you have any questions about the legal restrictions on real estate investing, please reach out to us. Our team of experienced real estate attorneys would be happy to help. To schedule a consultation, you can reach us at (770) 933-9009 or via our online contact page.