The Federal Housing Administration is extending its “anti-flipping” waiver through the end of 2012, which allows buyers to purchase homes that have already been sold in the last 90 days.

The waiver, which was soon set to expire, is “intended to accelerate the resale of foreclosed properties in neighborhoods struggling to overcome the possible effects of abandonment and blight,” Carol J. Galante, the acting Federal Housing Administration commissioner, said in a statement. “FHA remains a critical source of mortgage financing and stability and we must make every effort to promote recovery in every responsible way we can.”

An anti-flipping rule originally took effect in 2003 to stop a spike in home flipping that was being blamed on driving up home prices during the housing boom. The rule prevented FHA-backed loans from being used to purchase homes that had been owned by a seller for less than 90 days. But the U.S. Department of Housing and Urban Development decided to reconsider the 90-day limit in 2010 after skyrocketing foreclosures and abandoned homes were causing blight in neighborhoods across the country and hampering nearby property values.

The temporary waiver to the anti-flipping rule will allow buyers and investors to quickly resell refurbished homes and not have to wait 90 days to do so. Since the waiver took place in 2010, FHA has insured nearly 42,000 mortgages worth more than $7 billion on homes resold within 90 days of the last purchase, according to HUD.

“It’s certainly an inducement to move real estate and reduce inventories,” says Don Cameron, a real estate investor who owns a franchise of We Buy Ugly Houses in South Florida. “Why wait 90 days before you can close on a home?”

The waiver, however, still prevents predatory flipping, and sellers must justify any increases in value if the sales price of the property is 20 percent more than what the seller had recently purchased it for (such as by providing extra documentation on renovation expenses). Sales also must be in “arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.”

Source: “Government Extends Waiver of Anti-Flipping Law, Allowing Homes to be Bought and then Sold in 90 Days,” McClatchy-Tribune Regional News (Dec. 29, 2011) and HUD.gov

A real estate Short Sale is when a Lender agrees to sell the home at a price that is less then what is owed on the property.

Buying a Short Sale

• When you purchase real estate, sometimes it can be purchased as a result of a “Short Sale” which is nothing other than the bank agreeing to sell the home at a price less than the mortgage balance.

• As a result of the home being sold as a “short sale”, people assume that they are getting a great deal. This is not always the case. Although purchasing a short sale is often a great way to purchase real estate, many times due to the real estate market going through a downturn, you can purchase a home and still experience a reduction in value.

• I feel that the key to having success when you purchase a short sale is to make sure that you do research on the market conditions and area of the home, and have an experienced agent representing you exclusively as a “Buyer’s Agent”.

Short Sale Process

• The short sale can be very confusing because it is not as common as a regular real estate transaction.
• Typically the short sale process takes longer (3-4 months average) because the Seller’s title company or attorney has to deal directly with the bank and gain their approval to sell the home.

• When a client makes an offer to purchase a real estate short sale they do not have the benefit of getting a quick response like they would from a regular seller; however, the positive aspects of waiting for an approval from the lender certainly outweighs the negative.

• The short sale process begins with the Seller having to show that they are eligible for a short sale.

• All lenders typically require 2 years of tax returns, 2 years of W2’s, most recent month of bank statements for all accounts and a hardship letter.

• The process of getting approved for a short sale is the exact opposite of what a borrower goes through when they are trying to obtain financing.

• When a borrower obtains financing they have to show that they can afford to make the mortgage payments.

• When a Seller is trying to get the bank to approve them for a short sale, they have to show the bank that they have made every attempt possible to try and make the payments.

• If a lender sees that they have other liquid assets, they will not be very likely to help a seller out and approve them for a short sale without expecting some additional form of compensation at closing

Embracing Short Sales

• Short sales are fast becoming the preferred option for buyers wanting a “great deal”, and sellers who want to try to avoid the stigma of foreclosure and its long-lasting stain on their credit worthiness.

• At the same time, buyers perceive purchasing a short sale property as one of the best guarantees of a super deal; while banks have finally realized that they are likely to recoup more of their original investment by pursuing short sales instead of foreclosures.

• That being said, a short sale remains no less frustrating or time consuming for everyone involved in the process, unless you deal with professionals such as Perin Realty & Associates, LLC…..turning negative market forces into positive opportunities for our clients.

So it begs the question, “Why are banks holding out for higher offers when they currently have an offer to negotiate with?” The answer is simple – banks have insurance. The borrower has typically paid either private mortgage insurance or it is insured through Fannie/Freddie. So rather than accept the lower offer price, they would rather go through the foreclosure process and then collect the insurance on the home.

We are seeing this happen more and more as lenders get appraisals that are really much higher than market. There is little incentive for the bank to accept the true market value when they can collect the insurance premium for closer to the full value of the loan.

The harder part to all of this is that it really just hurts the borrower. Rather than be frank with the borrower and tell them to do a deed in lieu or accept the foreclosure, they are dragging their feet and providing a false hope that they might get it resolved with less impact. In reality, the banks prefer to foreclose, take the insurance money and get the non-performing asset off their balance sheet.

This is why you have seen an increase in the cost of mortgage insurance. More and more lenders are cashing in on their insurance policies and then the cost gets passed through to new borrowers to make up for the losses on previous bad loans.

So, if you are working on a short sale transaction right now and wondering why the bank didn’t accepting your market value offer, now you know!

FHA extends suspension of ‘anti-flipping’ rule for another year!

The rule was intended to prevent speculators from defrauding the government, but it also stifled the purchase and renovation of foreclosed homes by legitimate investors.

For years the federal government prohibited the use of Federal Housing Administration mortgage financing by buyers purchasing homes from sellers who had owned the property for less than 90 days.  The idea was to prevent speculators from defrauding the government through quick flips of houses – often involving straw buyers and corrupt appraisers – at wildly inflated prices.

One side effect of that policy had been to stifle purchase-and-renovate projects by legitimate, small-scale investors who buy houses after foreclosure or loan defaults and then resell them in substantially improved condition.  In many parts of the country, first-time and moderate-income buyers often sought to buy these fixed-up houses using FHA-insured mortgages with 3.5% down payments, but were prevented from doing so by the “anti-flipping” rule.

Now you can continue to sell to FHA buyers which is huge in today’s lending environment.  These are great loans to use for wholesale homes to first time home buyers and for wholesaling pretty houses.

“The short sale, which requires lender approval, is an important instrument for homeowners who owe more than their home is worth,” says NAR President Vicki Cox Golder. “While the lending community has worked to improve the size and training of their short sales staffs, they still have a long way to go on improving response times. As the leading advocate for homeownership issues, NAR believes that quicker attention to the short sales process is vital to help homeowners … as well as the nation’s economy.”

The number of potential short sale properties is rising across the country. According to NAR data, in the second quarter of 2010, four states have a significant share of properties with short-sale potential: Florida has 27 percent, Nevada 32 percent, California 28 percent, and Arizona 24 percent.

“Unfortunately, homeowners who need to execute a short sale are severely hampered because lenders (loan servicers) are unable to decide whether to approve a short sale within a reasonable amount of time,” Golder said. “Potential homebuyers are walking away from purchasing short sale property because the lender has taken many months and still not responded to their request for an approval of a proposed short sale price. Many consumers have mentioned that the delay in short sale price approval exceeds 90 days, and in many cases never arrives.”

Golder says she commends Reps. Andrews and Rooney for their efforts on the bill and urges Congress to pass the bill quickly.

Short sales are a valuable tool for struggling homeowners. But they’ve been notoriously difficult to complete, with buyers and sellers often playing a long waiting game before hearing back from lenders.

Now, however, a new government program plus some lender initiatives may make for shorter wait times and a smoother process. “Any structure is better than what we’ve had,” says Kathryn Bovard, a broker/manager for Prudential Americana Group in the Las Vegas area.

Elwood Smith

Short sales are useful for borrowers who are underwater on their mortgage, owing more on the home than it’s currently worth. In a short sale, the homeowner’s lender accepts less than what the borrower owes on the mortgage in order to complete the sale. Both parties thus avoid the foreclosure process.

Foreclosure Alternatives

The government’s Home Affordable Foreclosure Alternatives (HAFA) program goes into effect April 5.

“It’s an extension of [the Home Affordable Modification Program] to provide a default solution before it gets to the worst,” says Arvin Wijay, chief executive of Retreat Capital, a provider of products and services that facilitate short-sale management and loan modifications. If the borrower doesn’t qualify for a modification, loan servicers will then assess the possibility of a short sale through the HAFA program.

Here are some ways HAFA is expected to improve the traditional short-sale process:

• Borrowers will receive pre-approved short-sale terms before listing the property, including either a list price approved by the servicer or the acceptable sale proceeds, according to the U.S. Treasury Department. That way, sellers know what lenders will accept before listing the property.
• There’s a set timeline, with deadlines for lenders and sellers to keep the short-sale process moving.
• At the completion of a sale, borrowers may get up to $1,500 for relocation expenses and servicers may receive compensation of up to $1,000. Up to $3,000 of proceeds are available to distribute to subordinate lien holders, making it possible to compensate second-mortgage lenders.

Still, some in the industry are skeptical that the new program will be a great help to people.

“The homeowner should be encouraged that the government is doing something,” but people should not expect it “to change the world overnight,” says Fred Weaver, co-owner of Group 46:10, a team of agents who focus on short sales as part of Keller Williams Arizona Realty, in Tempe, Ariz.

Successful implementation also depends on servicers’ staff. “Some servicers are good at finding the right people, and have the right technology,” says Mr. Wijay. Some, he says, are not.

In the past, it was common for one mortgage-servicer employee to be responsible for managing hundreds of short-sale applications. But the method with which short sales are approved is starting to improve at some firms, and some banks have made staffing adjustments to better handle the volume.

“Banks are trying to put programs in place to facilitate more short sales in a shorter period of time,” says Mr. Weaver.

Some of the most recent efforts have allowed borrowers and real-estate agents to use an Internet portal to help improve communication, allowing them to submit paperwork electronically instead of faxing it, a practice that’s under way at GMAC Mortgage and Bank of America, according to Mr. Weaver. And lenders including Wells Fargo have committed to increasing their staff to deal with short sales, Ms. Bovard says.

Lenders “have finally gotten on board with the fact that short sales will be a large part of the market over the next 24 to 36 months,” says Ms. Bovard.

While the popularity of short sales differs by market, in the Las Vegas brokerage that Ms. Bovard runs, 70% of pending sales are now short sales, she says.

According to the latest Campbell/Inside Mortgage Finance survey of real-estate market conditions, short sales were the most popular category of sales for distressed properties. In January, short sales accounted for 15.9% of home-purchase transactions, compared with 13.4% of sales that were damaged bank-owned properties and 13.8% of sales that were move-in-ready bank-owned properties.

Short sales typically sell for 91% of their listing price, according to the survey results. Move-in-ready bank-owned properties typically sell for 99% of their listing price.

Words of Advice

For homeowners considering a short sale, Ms. Bovard says it’s important they speak to their trusted advisers, including their attorney and tax accountant, as well as a real-estate agent who has a short-sale designation.

When looking for a real-estate agent, says Kevin Kauffman, co-owner of Group 46:10, homeowners should ask about the agent’s track record with short sales: “How many have you closed? The follow-up question: How many did you fail on — how many went into foreclosure?”

Also, ask questions about the agent’s strategy in getting the job done, he says.

For buyers, a lot of patience is required to finish one of these deals, says Ms. Bovard. “It’s a long, involved process. But the payoff is getting a tremendous value.”

First it was the sub-prime market and now experts agree, adjustable rate mortgages combined with rising unemployment and falling property values could create another economic storm capable of ravaging the weak economic recovery.  Here’s a quick breakdown of the ARM Storm-Tracker for those savvy short sale investors to begin their planning:

Resetting Rates:  Current interest rates are at or near historic lows with 30 year fixed-rate mortgages below 5 percent while ARM’s are likely to readjust and drive the cost of monthly mortgage payments to double their former payments.  Unfortunately, many current ARM holders do not qualify for refinancing due to changes in employment status, high loan to value ratios and increased debt to income percentages.

Evaporating Equity:  Not only did millions of Americans take out Adjustable rate mortgages, but they built additions and over-improved their homes based upon loans.  As home values fell, so did the equity reserves required to refinance their ARM mortgages.  Whether it was a first mortgage with minimal down payment or a second (and even third) mortgage, lower property values have all but erased excess equity from a large number of buyers.

Cheaper to Walk:  Many homeowners are finding it less expensive to simply walk away from rapidly rising mortgage, rent for awhile then repurchase.  According to industry experts, a significant number of homeowners are capable of making the mortgage payment but simply don’t desire to do so given the cost of purchasing the same home after foreclosure.  Current homeowners are eligible for FHA loans in as few as three years after default – creating an inverse incentive to continuing paying on a property worth tens (or even hundreds) of thousands dollars less than the existing mortgage.

Renting, an Increased Option:  Throughout the nation lenders are getting creative in order to reduce the inflow of defaulting properties on their portfolio; one of the more popular options among existing homeowners is the ability to rent your current property for a specified period of time.

ReFi with an ARM?  It’s true, the FHA has a 3.87% five year adjustable rate mortgage option designed to help keep payments affordable. Unfortunately, it may simply delay the pain until interest rates continue to rise later.  However, with a 2 percent cap on each adjustment/rate increase, it could conceivably buy time for those in unusual short term situations such as temporary illness, job loss of other large expenses.  It also has the benefit of “buying time” for the banks and lenders who are in no hurry to acquire even more properties given the current backlog of non-performing properties in their portfolio.

What is a savvy short sale investor to do?  Get ready for the coming wave of ARM properties to hit the market.  Be sure your credit is in place and position yourself to solve problems for both homeowners and lenders in need of a new start.

It’s that time of year when families gather together for a good old fashioned feast, hours of football games and parades plus plenty of healthy debate. Whether you adore all your in-laws or can barely tolerate the thought of listening to stale jokes for one more year, chances are the holidays will still make any short sale investor rejoice due to timing. Yes – timing.  It’s a not exactly a trade secret but the holidays present the perfect opportunity for short sale investors. First, few buyers are making active offers during the holidays…and those numbers drop to near zero on Thanksgiving and Christmas Day.

However, research shows those same days are actually the best time to make an offer on a home. It seems most sellers are in a good mood and more generous, so willing to accept a lower than anticipated offer. Of course, it doesn’t hurt that home prices tend to drop to a twelve month low each December and sellers are very serious about selling – or at least getting a good offer- before the end of the year. People have a mindset that wants closure by the end of the year, so having a signed contract on hand provides the peace of mind they need and want to get on with the rest of their life.

Are you too shy or busy to drum up business on an actual holiday?  Try the first Tuesday of the beginning of the month. Not only has the seller just sent (or missed) yet another mortgage payment, but they didn’t receive an offer from anyone that happened to view the home over the prior weekend. Likewise, if you miss house-hunting during December, wait until early January to present really lowball offers; banks, brokers and sellers alike know few people want to trudge through rain, sleet and snow while looking at homes, plus the first of the credit card balances are beginning to come due after the big holiday spending spree. Think of it as one more way to motivate sellers and bankers to accept an offer without the need to beg, borrow or plead. Instead, point out the obvious to them – the bills are piling up, fewer homes tend to sell and it could be a long, cold and hard winter if they opt to wait it out rather than accept your bid.

Finally, one last word of advice when presenting a holiday offer for a short sale home; use a bid that ends in a zero such as $75,000 rather than a precise number such as $75,497.  Reliable research shows people perceive precise numbers as lower, and amounts ending in 000’s as higher. The reality may be quite the opposite, but like the old adage – perception is everything.

 According to the latest Realtors Confidence Index (RCI), one out of 10 recent home sales was through a short sale, but Realtors are concerned about the hurdles buyers face in short sales.  The primary reasons that some short sales fail include an incomplete short sale package, an offer that is too low, and inaccurate appraisals. According to Lynn Madison of the National Association of Realtors (NAR), buyers who are good candidates for short sales are very patient – it can take some lenders four months or longer to approve a short sale – have their financing in order, and don’t have any contingencies in their purchase offer.  “Short sale buyers need to have the time to be able to wait for the lender’s approval; some lenders get several hundred contacts every day,” said Madison. “Buyers must also be willing to make an offer that has a reasonable chance of closing and take guidance from their agent. If the offered price is too low, there is a good chance the lender won’t approve the contract.”  Charles McMillan, President of NAR, says “As short sales become more commonplace, both buyers and sellers need the help of seasoned, experienced professionals to help them navigate the complexities of a short sale transaction.”  Hey, that’s why we’re here!  Call Florida Auctioneers & Realty, LLC today (941) 927-8108.