Question: We have identified a home we would like to buy but we were told underwriting may require two appraisals. Why?
Answer: The home is probably a “flip” or in layman terms: a property that has changed ownership within the previous 90 days.An investor bought the home at auction or as a short sale, and has placed it back on the market, for a profit.
FHA issued mandates for property flips, but not every bank follows FHA guidelines. (See FHA 24 CFR 203.37) In other words, underwriting will be a little tougher. And many lenders will not originate flipped properties at all.All banks have modified guidelines on conventional financed flips. One major bank considers a flip within a 12 month period! Check with your lender to verify what they will allow.
Underwriters have been given a list of red flags for property flips. They include the following:
1. If the sales price is 20% or more over seller’s acquisition cost and the increase in value is due to improvements/renovation: The appraiser is required to verify the repairs or work to the property in order to substantiate the increase in value. A seller’s list of improvements along with receipts will be required to justify the increase. Before and after pictures are welcomed.
2. If the appraiser cannot warrant that legitimate work was done to the property to substantiate the increase in value, then a second appraisal will be required. This parts hurts: the lower of the two will be used for the appraised value. FHA loans will require an automatic second appraisal unless there is less than a 20% increase.
3. If the increase in value is not due to any significant improvements, the appraiser will be required to provide explanations of the increase in property value and provide sales comparables to support that value since the prior title transfer; OR if justify the increase in value, a second appraisal may be required. The lower of the two will be used for the appraised value. (Still hurts) If the sales price is less than 20% over seller’s acquisition cost (the seller can provide receipts for improvements to help get to the 20%) typically a second appraisal is not required. But keep in mind it is underwriter’s discretion.
FYI: A “flipped” home utilizing FHA financing will require a copy of the home inspection to be viewed by the underwriter. All noted items will need to be repaired before closing. FHA expects these quick turnaround properties to be near perfect for their first time home buyers.
FYI2: If you work with investors, please do not allow them to play havoc with the Deed. This includes adding or removing a family member or transferring into or out of an LLC. Only one Deed transfer per a twelve month period is typically allowed.
