Real Estate Recovery Roadblock #2: The FHA 90-Day Seasoning Requirement

fha steak seasoningThere are certain seasoning requirements I absolutely love.  For example, if I’m cooking halibut on the grill I must coat it with olive oil and add Emeril’s Essence.  And no rib eye tastes right to me without McCormick’s Montreal Steak seasoning.  For other great recipes see the Food Network website.  But on to business…it’s time to get on my soapbox.

The FHA 90-Day seasoning requirement is more like the Great Wall of China to real estate recovery than a roadblock.  Here’s what it means to you, the investor.  The FHA will not insure the loan for the buyer of your home if you the seller have owned it less than 90 days.  In other words if title of the property has changed hands in the last 90 days because you the investor bought the property through a short sale, at the auction, or from a bank or wholesaler you cannot sell it to an FHA qualified buyer until day 91.  And this absolutely, completely, unequivocally sucks big time.  Especially since real estate people who track this stuff say about 25% of the buyers out there go FHA.

What is equally frustrating is that the VA and USDA have no such requirements.  None…zero, zilch, nada.  But unless you are flipping houses in an area with a high concentration of military personnel good luck finding a VA approved buyer.  And the USDA eligible properties are usually located on the outer edges of the city (if you are wondering where you can go to find if a property you have or want to buy is in one of these areas visit the USDA Property Eligibility site.)

great wall of chinaWhy does the FHA have this requirement?  Obviously, because it prevents flipping!  Believe it or not there are a few bad apples out there that have manipulated values and artificially driven up prices in certain areas.  Rather than dealing with the bad guys it was easier for the FHA to create a policy that today not only harms the buyer and seller, it also severely hinders a real estate recovery.  I believe these are called ‘unintended consequences’.  It would be nice if the FHA recognized that while there have been times when investors were poison to the real estate market, at this critical point in time they are the anecdote.

So what is a savvy real estate investor to do?  Buy strictly near military bases and on the outskirts of town?  Well, yes.  Unless you’d rather rack up thousands of dollars in holding costs waiting until you find a conventional or all cash buyer, or even worse, day 91, to start marketing your flip.  Of course, there are other creative ways to get your home sold and save on holding costs, like a short-term lease/option with a well-qualified FHA buyer.  But in this scenario you better have a huge margin factored in up front because it could take up to five months to get a deal like this closed.

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