Investors, Tax Credit & 90 Day Seasoning.

crystal ballI rarely write on investor topics, because most of my topics come from recent issues discussed with one or more of my clients. But this week I was speaking with one of the few investor clients I choose to work with, though I use the term “work with” loosely, as most of the time I tell him “no, I don’t think that’s going to work out well for you.”

The client is looking at relatively lower priced homes. Without getting into too much detail due to confidentiality reasons, suffice it to say that the property purchased would end up back on market in a short time. While I am helping him purchase, and may or may not be helping him sell it later, I cannot move a step forward (for him) if I see a chink in the plan going ALL the way forward. Some will say that’s not my job, just write it up and let him buy the thing…but my brain just isn’t wired that way. But that’s the subject of another post.

It is very difficult to have a wide enough profit margin on a flip project to make it worthwhile. For that reason and many others, this is not a time when I accept investor clients without a lot of thought and penciling out of the numbers. That rules out most if not many investors except those “able” to do a lot of the work vs. hire it out. EXCEPT there is that problem of local laws that suggest, and buyers who want, ONLY a licensed contractor making those repairs and improvements.

But that is not the biggest current chink in the plan. The problem as I see it is balancing the timing of the soon to be buyer credits with The FHA 90 day seasoning rule.  Lower priced home sales over the next slightly less than 6 month period will most likely be supported by a new credit for buyers who are in contract on or before April 30 of 2010, this based on information available at present. What will happen at the end of that period is anyone’s guess, but my guess is that it will not be extended beyond that date in a meaningful way and that the market will react negatively come May 1, 2010. Even if the powers that be move to a phasing out stop-gap credit, I think that will be a total waste of money on all fronts, and that May 1, 2010 is D-Day anyway you slice it. It’s the day the carrot on the stick is no longer fit for consumption and a new carrot will not be forthcoming.

OK…moving on…why is this a problem? You write up the purchase, you close in 30 to 45 days…say mid December. Now, in order to get the property in escrow with a buyer before April 30, 2010 you rush a team of workers in there and get the whole thing done and back on market in 4 weeks by Jan 15, 2010. That gives you 105 days to get it into contract with a new buyer, right? Not so fast…maybe not.

Let’s assume that many if not most people in that area have been buying via FHA vs. 20% down or more Conventional. Each area is different and in this case FHA is the primary means of purchase in this price range for owner occupant buyers. In the instant case, the house specifics suggest the buyer will NOT be someone with lots of downpayment. Now let’s assume that if you can’t sell the house via FHA, you probably won’t sell it at all. Now let’s add one of the “newer” FHA restrictions (of many) The 90 day Seasoning Rule. This rule requires that the owner (my client) own the property for at least 90 days (seasoned ownership) before selling it. There are some exceptions to that rule, including banks who have foreclosed on the home:

On September 1, 2009, the rule was somewhat relaxed.  FHA now allows for a waiver when the property  is owned by a bank or some other foreclosing entity.  It also allows for a relaxation of the rule when a home is sold by a state or federal agency.

Now let’s go back to our timeline. He closes on the purchase on Dec. 15, 2009. He has to own it 90 days before the buyer can get FHA financing, that takes us to March 15th. Now his 105 days starts looking more like March 15 to April 30 or 45 days. There is no easy answer here and you can list it on January 15th and say “cannot close before March 15 IF the buyer is using an FHA loan”. But if you can’t get loan approval until March 15, you can’t close ON March 15 as a result….you see where I’m going here.

This weak market is not all about supply and demand. This weak market is not all about tighter lending standards as to income and downpayment needed to purchase. This weak market is not purely based on the rise and fall of the Homebuyer Credit.

Rather…this weak market going all the way back to August of 2007 (for the Seattle Area) is about the rules of the game constantly changing so much and so fast that sometimes waiting on the sidelines for the dust to settle becomes the best option. For flippers…well, it ‘s a very, very tough time to be one and it is not for anyone who wants to put on rose colored glasses. Get out your crystal ball and look at all the chinks in the armor.

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ARDELL is a Managing Broker with Better Properties METRO King County. ARDELL was named one of the Most Influential Real Estate Bloggers in the U.S. by Inman News and has 33+ years experience in Real Estate up and down both Coasts, representing both buyers and sellers of homes in Seattle and on The Eastside. email: cell: 206-910-1000

24 thoughts on “Investors, Tax Credit & 90 Day Seasoning.

  1. And…if the home is sold 90-120 days after aquistion (unless exempt):

    A lender must obtain a second appraisal by another appraiser if
    • the re-sale date of a property is between 91 and 180 days following the
    acquisition of the property by the seller, and
    • the resale price is 100 percent or more over the price paid by the seller when
    the property was acquired.
    FHA reserves the right to revise the resale percentage level at which this
    second appraisal is required by publishing a notice in the Federal Register.
    Example: If a property is re-sold for $80,000 within six months of the
    seller’s acquisition of that property for $40,000, the lender must obtain a
    second independent appraisal supporting the $80,000 sales price. Even if the
    lender provides documentation showing the cost and extent of rehabilitation
    that went into the property resulting in the increased value, the second
    appraisal is still required.
    Note: The cost of the second appraisal may not be charged to the borrower.

  2. Jerry,

    There are pros and cons to everything. I am thinking of two absolutely decrepit rat traps that someone bought, improved and sold. The neighbors were ecstatic.

    • I would say like everything, there are those who were actually good at flipping and those who were not. You can say the very same thing about “builders”.

      One of my clients bought a house that was once a terrible place–neighbors hated walking by it, I was told at her housewarming. The home is beautiful–probably one of the nicest “flips” I’ve seen.

    • Ardell- To me Flippers per se are those who buy a property, do minimal cosmetic things to paper over the many inherent defects and then unload these puttied-over places on the unsuspecting. Renovators as such are an other thing entirely- worthy of my respect and the public’s. JG

      • A “flip” to me is more about time vs. quality, unless you are saying quality by definition takes too much time to be a “flip”.

        In a flip every day is a day of carrying costs, so time is of the essence.

        • wouldn’t this apply to most builders as well: ‘every day is a day of carrying costs, so time is of the essence.”

          A builder WISHES they could “flip” a property if the term flip is defined by time.

          The “flip” industry suffers from what mortgage origination did; too easy to get into and too many people doing it for the wrong reasons. Both industries are changing.

          • Not really, Rhonda. A “flipper” doesn’t necessarily need to “do” anything to the property and it is merely a function of time that makes it “a flip”. (e.g. a quick flip)

            One can buy at foreclosure for $120,000 and sell for $160,000 within a week and it would be a “flip”, but not have anything to do with “quality of improvements”.

  3. Jerry,

    I don’t have anything to do with all of the changes…or there would not have been any 🙂 You’ll have to ask whomever is in charge these days and if you can find out who that is…let me know.

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