The Anti-flipping rule or FR-4615
The Anti-flipping rule (FR-4615) changed the real estate wholesaling business dramatically. If you’re new to real estate wholesaling or investing, and someone has told you that property flipping is illegal, it’s probably due to confusion about this HUD rule.
The Anti-flipping rule or FR-4615 was published by HUD (Dept. of Housing and Urban Development) on May 1st, 2003 to address property “flipping” on mortgages insured by the Federal Housing Administration (FHA).
This distinction of “mortgages insured by the Federal Housing Administration” is particularly important for you if you intend to go into real estate wholesaling or active real estate rehabbing and resale.
For one thing, it does not prohibit or even regulate property flipping on mortgages NOT INSURED by the Federal Housing Administration. Those transactions are still legal as long as you stay away from loan fraud or any other practices defined as illegal by federal law and the law in your state.
FR-4615 did create new business hurdles for wholesalers and other “Quick-turn” real estate investors with some of the following:
- Confused Definition of “property flipping”
The announcement – in the Federal Register - of this rule included a new definition of property “flipping” as occurring “when a recently acquired property is resold for a considerable profit with an artificially inflated value”.
This created a stigma to the term “flipping” which prior to this had been used simply to describe the process of legally acquiring (or controlling) and reselling a property for profit within a relatively short time.
The definition given by FR-4615 is more accurately termed “mortgage fraud” (in my humble opinion), but they chose to go with “property flipping”. Imagine trying to convince a private lender to partner with you as a “real estate flipper” with this confusion.
- Sale by “Owner of Record” Only
Under the anti-flipping rule, “only the owner of record may sell a home to an individual who will obtain FHA mortgage insurance for a loan”. For a quick-turn real estate investor, this means that you cannot wholesale a property to an FHA buyer, which you have not purchased and completely recorded at the courthouse. Creative acquisition techniques such as a Real estate option, Power of Attorney (POA) or Subject-to financing don’t work under this restriction.
- No Sales Contract Assignments or Resale
Sales Contract assignments are explicitly barred for FHA Buyers. Meaning that if you signed a contract on a property and tried to assign the contract to an end buyer, that end buyer would not use FHA-insured financing (or so-called “FHA loans”) to purchase your contract.
- Time Restrictions on Re-sales (The Seasoning Issue)
FR-4615 also defined how soon after a house is flipped it would be eligible to be bought with a FHA-insured loan. Before the anti-flipping rule, you could buy a house at $100,000 dollars and re-sell it within hours or days to most buyers at $150,000 dollars as long as inspections and appraisals supported this re-sale value.
(By the way, this is still the case for non-conforming loans – loans that are not insured by HUD or restricted by HUD guidelines)
With the advent of the anti-flipping rule, re-sales occurring within 90 days or less after acquisition would not be eligible for FHA-insured mortgages, re-sales are eligible with an additional appraisal from an independent appraiser (buyer-appointed, most likely).
Additionally, FR-4615 requires the buyer’s lender to obtain additional documentation (i.e. repair documentation) to support the value for re-sales occurring between 90 days and 1 year in locations or circumstances where HUD considers flipping to be a problem.
Quick-turn Real Estate after FR-4615
The restrictions imposed on the “buy-side” by the anti-flipping rule means that you as a wholesaler would be stuck with the possibly draconian terms of whatever bridge financing you used to acquire the property.
Successful real estate wholesalers, rehabbers and other quick-turn real estate specialists have made adjustments in their business to deal with the realities of FR-4615. Some include:
- Wholesaling Deals strictly to cash buyers or privately-funded investors
- Legal “assignment loopholes” like “entity assignments” rather than contract assignments
- Identifying lenders that specialize in non-conforming loans or have no seasoning requirements.
Disclaimer: As usual I should remind you that I am neither an attorney nor an accountant. (Just a strategic real estate coach.) No information on this website should be construed as legal advice. It is merely for informational and entertainment purposes.
Whatever you do, make extra sure to deal ethically with sellers, buyers and lenders. Study the laws, regulations and ordinances that affect your business. Join a local real estate investors association or club and ask around for a competent and experienced attorney who can tell you exactly what is legal or not and why or why not.
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