A number of laws govern businesses today, and most of these laws have been introduced in order to protect consumers. One such law is the Anti-Flipping Law, or FR-4615, which governs the real estate industry. The department of Housing and Urban Development (HUD) introduced the Anti-Flipping Law in 2003 to address property ‘flipping’ on mortgages insured by the Federal Housing Administration (FHA).
According to the Federal Register, ‘property flipping’ is “when a recently acquired property is resold for a considerable profit with an artificially inflated value.” The Anti-Flipping Law was published in the Federal Register to prevent the flipping of properties financed with a mortgage insured by the FHA. However, this rule does not prohibit or regulate property flipping on mortgages that are not insured by the FHA.
How the FR-4615 (Anti-Flipping) Law Works
According to the Anti-Flipping Law, “only the owner of record may sell a home to an individual who will obtain FHA mortgage insurance for a loan.” This means that a property that has not been purchased and completely recorded at the courthouse cannot be sold to an FHA buyer. Moreover, sales contract agreements are explicitly barred for FHA buyers. That is, if a contract is signed on a property and the new owner attempts to assign the contract to an end-buyer, the end-buyer cannot use FHA-insured financing, otherwise called FHA loans, to buy the contract.
FR-4615 also adds certain time restrictions on re-sales:
Re-sales within 90 days following acquisition are not eligible for a mortgage insured by the FHA. This restriction aims to eliminate ‘quick flips’ because the FHA has identified that the most egregious instances of predatory lending were on ‘flips’ that occurred within a very short time span (usually within days).
Re-sales occurring between 91 and 180 days are eligible only if the lender obtains an additional appraisal from an independent appraiser based on a re-sale percentage threshold established by the FHA. This threshold is relatively high so that it does not affect legitimate rehabilitation efforts, while deterring unscrupulous sellers, lenders, etc., from attempting to defraud home buyers.
In addition to this, FR-4615 requires the lender to obtain additional documentation to support the value for re-sales occurring between 90 days and one year in locations or circumstances where HUD considers property flipping to be a problem.
In early 2010, the FHA amended the Anti-Flipping Law to waive the long-standing 90-day window between buying and selling a home with the aim to stabilize home values in local communities burdened with too many bank-owned houses. The FHA has extended this waiver through the remainder of 2011. This means that buyers can continue to use FHA-insured financing to purchase HUD or bank-owned properties or properties resold through private sales.
While real-estate experts are of the opinion that the Anti-Flipping Law has impeded resale of homes, affecting small entrepreneurs, there is no doubt that it attempts in every possible manner to protect home buyers from fraud.