Rules for flipping property in texas

First, a flip is when an investor purchases a property and resells the property in a short amount of time. In most cases, the investor rehabilitates the property to some extent. As a lender, we want to protect our client (the borrower) and our own interests; therefore there are guidelines that we must follow. These guidelines are passed down by Fannie Mae, Freddie Mac, FHA, VA and USDA.

Below is a summary of the general guidelines that apply when a property is identified as a flip:

Conventional Loans (Fannie Mae/Freddie Mac)

Properties acquired by the seller within 90 days preceding the current sales contract date are acceptable provided:

  • No Non-Arms Length Transactions
  • If the sales price has increased greater than 20%, the increase must be justified.
    • f the value increase is due to recent renovations or improvements, the appraiser must supply interior photos of the renovations and comment on the cost of the repairs/renovations and likely contribution to the value increase.
    • If no renovation was performed, an appraisal review must be ordered. This is when a 2nd appraiser reviews the original report and provides feedback...basically they critique the first appraisal to be sure the value is supported.

FHA

Sales within 0-90 days of seller's acquisition: (calculated from seller's acquisition date to new purchase contract date)

  • All transactions must be arms-length; no identity of interest between buyer, property seller or third parties. Specific ways to ensure an arms-length transaction include:
    • roperty seller currently holds title to the property.
    • LLCs, corporations or trusts serving as property sellers must meet all applicable and federal law.
    • The property cannot have been sold in the 12 months prior to the transaction in which the seller acquired the property.
    • The property was marketed openly and fairly.
  • A lender may allow the 90-day flip waiver if the sales price is less than 20% over the seller's acquisition cost for all property sellers, including private sale transactions.
  • Alender may allow the 90-day flip waiver with a sales prices greater than 20% above acquisition only if justification for the increase in value can be verified. Document that the seller has completed sufficient legitimate renovation, repair, or rehabilitation work on the subject property to substantiate the increase in value.
    • Must have DU Approve/eligible - No manual or LP
    • Max DTI is 50% regardless of AUS response
    • A second appraisal must be ordered:
      • RELS Valuation must perform the second appraisal.
      • The cost of the second appraisal may not be charged to the homebuyer.
      • The second appraisal  must not be used for case processing and must not be entered into the FHA connection.
    • A property inspection must also be ordered and provided to the purchaser before closing. The borrower may be charged for this inspection. 

Sales within 91-180 days of seller's acquisition:

A second FHA appraisal is required and the appraised value is more than 5% lower than the first appraised value, the second appraisal must be used to calculate the maximum mortgage amount.

VA and USDA

  • There are no specific guidelines regarding flip transactions, but the new purchase price must be compared with the original price paid by the investor and the appraiser must justify the increase in value. In other words, evidence of some repairs or maintenance must be present if the value increased substantially.