Flippers can now sell to FHA borrowers which should help lenders move their bloated inventories. Today's featured property is another Trustee Sale flip.
Irvine Home Address … 7 SMOKESTONE 3 Irvine, CA 92614
Resale Home Price …… $348,000
He made a giant mess
And he left it for the rest
To clean up after
Now the lawyers do their best
To try to divvy up
What's ever left
In the ending you can bet
Everyone feels cheated
Kiss your ass good-bye
Boy you're out of time
You didn't choose life
It's just your luck
You got your turn now
Give it up and
Kiss your ass good-bye
Kiss Your Ass Goodbye — Styx
As we have been watching the Trustee Sale market more closely, we observe a recent trend toward speeding foreclosure. No, lenders are not issuing Notices of Default (NOD) any quicker — there is still massive shadow inventory — but lenders are proceeding to Trustee Sale at a brisk pace once the NOD is filed. In early 2009, most auctions were delayed, and many were delayed several times. Not anymore. The majority of Trustee Sales in Irvine are occurring at their scheduled date with no postponements.
With the huge influx of inventory coming our way, our government is removing any impediments to moving properties quickly through the system. One of these impediments is the 90-day no-flip rule at the FHA, HUD TAKES ACTION TO SPEED RESALE OF FORECLOSED PROPERTIES TO NEW OWNERS:
"In an effort to stabilize home values and improve conditions in communities where foreclosure activity is high, HUD Secretary Shaun Donovan today [January 15, 2010] announced a temporary policy that will expand access to FHA mortgage insurance and allow for the quick resale of foreclosed properties."
There is a rule, widely known among property flippers, that prevents FHA financing from being used on properties sold in the last 90 days (actual FHA regulation):
(b) Time restrictions on re-sales—(1) General. The eligibility of a property for a mortgage insured by FHA is dependent on the time that has elapsed between the date the seller acquired the property (based upon the date of settlement) and the date of execution of the sales contract that will result in the FHA mortgage insurance (the re-sale date). The mortgagee shall obtain documentation verifying compliance with the time restrictions described in this paragraph and must submit this documentation to HUD as part of the application for mortgage insurance, in accordance with §203.255(b).
(2) Re-sales occurring 90 days or less following acquisition. If the re-sale date is 90 days or less following the date of acquisition by the seller, the property is not eligible for a mortgage to be insured by FHA.
(3) Re-sales occurring between 91 days and 180 days following acquisition. (i) If the re-sale date is between 91 days and 180 days following acquisition by the seller, the property is generally eligible for a mortgage insured by FHA.
From HUD Press Release:
The waiver will take effect on February 1, 2010 and is effective for one year, unless otherwise extended or withdrawn by the FHA Commissioner. To protect FHA borrowers against predatory practices of "flipping" where properties are quickly resold at inflated prices to unsuspecting borrowers, this waiver is limited to those sales meeting the following general conditions:
- All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.
- In cases in which the sales price of the property is 20 percent or more above the seller's acquisition cost, the waiver will only apply if the lender meets specific conditions.
- The waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program.
Flippers everywhere are rejoicing, but they aren't the only ones; fraudsters everywhere must be figuring out how they can game the system. Interesting that official policy and language at HUD and FHA considers flipping "predatory." It is clear from the language they chose that authorities at the FHA are not keen on flippers.
I am a bit unclear on how the predation takes place. If it is an arms-length transaction, and the appraisal is legitimate supporting the value, isn't the flipper merely converting a property back to cash?
I suspect this rule and its repeal are a reaction to retail flippers as I described in The Changing Face of Flipping. If you encourage retail flipping — which this rule change does — it merely inflates prices for families — an arguably predatory practice — but if you encourage Trustee Sale flipping, it provides market liquidity at Trustee Sales where families are generally excluded anyway. IMO, it would have been much wiser to simply carve out an exclusion for Trustee Sales or Mortgage auctions, but that isn't the route the FHA is going. Perhaps the change is also a recognition of lender's new role as property flippers; the more money flippers make, the more money lenders recover from their real estate owned (REO).
Been there done that
Today's featured property was for sale last fall for $300,000, and for whatever reason, it did not transact (2007 Knife Catchers). The current flipper is hoping it had short-sale bids at $350,000 but the lender wouldn't approve the sale.
Should you buy it?
Let's say you make $75,000 a year, and you have $12,000 in liquid savings plus other reserves. You could buy today's featured property for $350,000 and have your monthly cost of ownership top out at $1,750 per month. That is a reasonable DTI at or near rental parity.
If you purchase today, you will be able to afford a fully amortized payment and you will build financing equity by paying off the mortgage, but that is reflected in the $2,380 you are actually spending each month to live there. If the total monthly cash outlays were equal to rent — with prices at cashflow investor levels — then I might be interested, but to simply tread water with a forced savings account is something I could do in a rental, and I have no downside risk.
Saving money versus renting is the financial consideration that should pique the interest of buyers purchasing properties they would not want to live in long term. It isn't an appreciation play, it is a savings play. You don't bank thousands per month for nothing via appreciation, you bank what you can out of your wage income by paying down a mortgage or saving versus renting. It isn't as easy, and it isn't as glamorous, but it is our future.
The buyer of a property like this one should be entering the market well below rental parity in order to save downpayment money for the big house they want later. Renting is not the only path to income savings; owning can be a path to increased savings if the focus is on savings versus renting, but most people don't look on ownership as a cost-saving opportunity because during the bubble, they didn't have to — ownership itself was enriching.
Buying this property only makes sense as an investment if you believe rents will go up, inventory at lower prices will dry up, and therefore resale prices will go up. It is a foolish appreciation play. An owner-occupant might do as well as a renter if they hold for five years, and perhaps better if they hold longer. There is the intangible element of "owning," but second-story apartment condos don't exude pride-of-ownership like more desirable detached properties. Do you want to spend the next 5 years here?
(pictures below are from the previous listing and do not reflect any pergraniteel installed by the flipper)
Irvine Home Address … 7 SMOKESTONE 3 Irvine, CA 92614
Resale Home Price … $348,000
Income Requirement ……. $73,127
Downpayment Needed … $12,180
3.5% Down FHA Financing
Home Purchase Price … $295,000
Home Purchase Date …. 10/23/2009
Net Gain (Loss) ………. $32,120
Percent Change ………. 18.0%
Annual Appreciation … 50.6%
Mortgage Interest Rate ………. 5.13%
Monthly Mortgage Payment … $1,830
Monthly Cash Outlays ………… $2,380
Monthly Cost of Ownership … $1,750
Baths 1 full 1 part baths
Home Size 917 sq ft
($379 / sq ft)
Lot Size n/a
Year Built 1980
Days on Market 4
Listing Updated 1/27/2010
MLS Number S603193
Property Type Condominium, Residential
Quiet,inside loop location. This turnkey Upper end unit with good size balcony is at one of the best locations in Woodbridge. It is facing the park with pool and spa and only a few blocks from beautiful South Lake Beach Club, Lagoon, tennis club, and Meadowpark Elementary School. There are over $15,000 of upgrades throughout… New hardwood flooring, New paint, New granite kitchen countertop, brand new waterheater and furnance. Move In condition.
I am in favor of compounding words, but "waterheater?"
furnance? Is that like flaming finance?
Furnance: the place toxic mortgages burn and smolder in the Federal Reserve's vault.