Co-Author: Jeremy S. Durham
Buyers at foreclosure auctions must purchase with cash (eliminating much competition), often don’t have the opportunity to inspect the interior of the property, and risk being redeemed out by junior lien holders. Generally, foreclosure buyers acquire properties at below their retail fair market value. While it is intuitive that they should be exempted from FHA’s seasoning requirements when flipping property, foreclosure buyers are not so exempted.
The commonsensical premise of the FHA seasoning requirements is that the rapid resale of a property at a price over the acquisition price makes the resale price suspect, therefore making the financing that funds the flip transaction, and is secured by the flipped property, suspect. Federal regulation 24 CFR Part 203.37 restricts the availability of FHA mortgage insurance for properties that are re-sold less than 90 days following the date of acquisition by the seller.
The 90 day clock starts on “the date the seller acquired the property.” FHA underwriters seem to interpret this language to mean that the 90 day clock starts on the date on which the flipper’s acquisition deed is recorded, not the earlier date when the flipper receives title. Under Colorado foreclosure law, title passes to the holder of the certificate of purchase eight business days after the foreclosure auction, unless a junior lien holder files a notice of intent to redeem. If no junior lien holder files a Notice of Intent to Redeem, the public trustee later issues a “Confirmation Deed” that merely confirms that title passed after the expiration of the eight business day period. But the public trustees cannot issue the deed until 15 business days after the auction, and the deed typically doesn’t get recorded for another several business days. This impedes the investor’s ability to sell the property to an FHA buyer for essentially an extra month beyond the FHA 90 day waiting period.
Can the contract come before the 90 day period if it closes after the 90 day period? The rule states that the re-sale date is “the date of execution of the sales contract that will result in the FHA mortgage insurance.” Therefore, the contract that closes for the resale of the property must be mutually executed more than 90 days after the lender’s acquisition.
There are logical exceptions to the FHA seasoning requirements. The resale of real estate owned (REO) by lenders is exempted. Yet if someone other than the foreclosing lender acquires title at the foreclosure auction by outbidding the foreclosing lender, the investor doesn’t benefit from an exception. The lack of an exception for foreclosure buyers inhibits the speed with which affordable housing can be sold to owner occupants.
Jeremy S. Durham was a law clerk at Frascona, Joiner, Goodman and Greenstein, P.C.