If you are interested in investing in real estate, you may have heard about the 90 day flip rule. These investors have heard rumors of this FHA rule, and they worry that it will affect a future flip.
With the 90 day flip rule, the FHA forbids lenders from approving a loan for a property that the seller has owned for less than 90 days. In broad terms, the FHA wants to avoid potentially unreliable, massive swings in a home’s valuation due to a flip rehab.
In this article, I’ll explain the 90 day rule, some workarounds, and why it shouldn’t concern house flippers.
Specifically, I’ll dive into each of the following topics:
- What is the FHA?
- 90 Day Flip Rule Overview
- Flip Rule Workaround 1: Second Appraisal
- Flip Rule Workaround 2: Cost Breakdown
- Why House Flippers Shouldn’t Worry about the 90 Day Rule
- Final Thoughts
What is the FHA in real estate?
Prior to discussing the FHA’s 90 day flip rule, I need to first provide an overview of the FHA.
What is FHA? FHA stands for Federal Housing Administration, and the organization provides mortgage insurance on loans issued by FHA-approved lenders in the United States. As such, the FHA doesn’t actually loan money. Rather, by insuring loans, the organization lowers the risk for FHA-approved lenders by providing them protection in case a borrower defaults on a loan.
Due to this increased protection, FHA-approved lenders face less risk and can therefore offer borrowers A) lower interest rates, and B) lower down payment requirements. Put simply, if a borrower defaults on a loan, the FHA will pay out a claim on the unpaid loan balance directly to the lender.
However, borrowers need to understand that this FHA protection comes with strings attached. If you apply for an FHA-insured loan, you – and the property – will need to meet certain FHA-mandated requirements to qualify for the loan. These requirements include the 90 day flip rule, which I’ll discuss in the following sections.
90 day flip rule in real estate
As stated above, FHA-insured mortgages provide buyers outstanding benefits. Of note, with these loans, buyers can qualify with a 3.5% down payment – a far better option than a conventional 20% down payment. This reduced down payment means that a large number of first-time home buyers use FHA-insured loans, meaning that house flippers who sell to these buyers need to understand the associated requirements.
With the 90 day flip rule, the FHA forbids lenders from approving a loan for a property that the seller has owned for less than 90 days. In broad terms, the FHA wants to avoid potentially unreliable, massive swings in a home’s valuation due to a flip rehab.
In other words, if a home appraised for $50,000 initially, and then two months later – after a rehab – appraised for $150,000, the FHA inherently does not trust that massive increase in value. As an insurer, the FHA wants to make sure the loans it insures are backed by accurately appraised properties.
The 90 day rule helps meet this FHA goal. The FHA wants rehabbed properties to undergo a “seasoning period,” during which enough market comps can be generated to accurately reflect the post-rehab value.
From an enforcement perspective, the FHA drives compliance with the 90 day rule by requiring lenders to check a property’s chain of title prior to approving the loan. Lenders check with the local municipality to confirm that the property’s last recorded deed is not within 90 days of the new purchase contract date. If within the 90-day window, lenders will deny the loan and force buyers to wait until 91 days to sign a new contract.
90 day flip rule exception: second appraisal
As with most rules, exceptions to the 90 day flip rule exist. Or, as I look to call them – workarounds.
If you’d like to sell a rehabbed property before 90 days, the first workaround entails getting a second appraisal. As stated above, the FHA worries that, with quickly flipped houses, the after rehab value (ARV) does not accurately reflect the local market. For example, if a property appraises for $250,000 immediately following a two-month rehab, the FHA, by default, will not accept that valuation.
Consequently, if sellers (or buyers) need to close prior to 90 days, they can have the property appraised a second time. If the second appraisal comes in at or near the same value as the first one, most FHA-insured lenders will accept the valuation and approve the loan. Basically, this second appraisal confirms an honest and accurate property valuation, which puts the FHA at ease.
90 day flip rule exception: cost breakdown
The second workaround to the 90 day flip rule actually represents more of a continuation of the above rule, as it still involves a second appraisal.
However, some lenders will demand more than a second appraisal to waive the 90 day requirement, and a rehab cost breakdown will generally meet these requirements.
Here’s how it works.
After providing the lender a second appraisal, flippers need to show the lender the following:
- Confirmation of how much you – the flipper – purchased the property for initially.
- A detailed cost breakdown of your rehab costs.
- Confirmation that you’re not making more than a 10% return on the flip.
For example, if you’re selling the rehabbed property for $100,000, the lender will want to see proof that you’re not making a profit of more than $10,000 ($100,000 sales price times 10%). Put another way, your initial purchase, rehab, holding, and sales-related costs need to total at least $90,000 to sell the property for $100,000.
The FHA has decided that a 10% return on a house flip reflects both market demands and its own requirements, so it allows this option as a workaround to the 90 day flip rule.
Why House Flippers Shouldn’t Worry about the 90 Day Rule
Okay, after explaining the above workarounds, here’s why house flippers don’t need to worry about the 90 day flip rule: it doesn’t really affect you!
All the FHA is saying with this rule is that they don’t want to insure loans on properties sold within 90 days of a house flipper initially purchasing it. But, think about it: how long does it actually take to:
- Completely rehab a property?
- Find a buyer for that property?
- Actually close on the loan?
It’s likely going to take more than 90 days to complete all of the above, which makes the 90 day flip rule irrelevant.
And, you’re allowed to list the property before 90 days and sign a contract. But, sometimes the lender will just require you to void that initial contract and sign an updated one for compliance purposes after the 90-day window – a minor inconvenience that absolutely should not dissuade you from a flip.
Final Thoughts
Bottom line, don’t worry about the 90 day house flip rule. If it ends up becoming an obstacle in one of your deals, just use one of the above two workarounds. However, as stated, flippers will very rarely have to deal with this rule, as most flips just can’t realistically be completed in less than a 90-day window.
And, remember, the 90 day rule doesn’t restrict the actions of the house flipper; it simply limits the loan approval options for potential buyers. Keeping that in mind, don’t let this rule paralyze you as a flipper. The most important thing you can do is go out and start making deals!
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