My Real Estate Blog

Foreclosure and REO investors have begun taking a closer look at the Obama administration's recent loosening of rules on property "flips"… . And they're seeing some potential complications.

The policy change allows investors to resell houses they've acquired and rehabbed in less than 90 days to buyers using low-downpayment FHA mortgage financing.

Most investors welcomed the loosening of the rules, but said there are snares for the unwary.

For example, the program sets a 20 percent cap on the difference between an investor's acquisition cost of a foreclosure and the price paid by the new buyer.

Price gains in excess of 20 percent must be justified with extensive documentation of the improvements made and their impact on the property's valuation.

Here's a possible scenario:  If a foreclosure sells for about $165,000, while the average non-distressed house sells for around $210,000. An investor buys a foreclosure at $165,000 and does enough fix up to sell for $210,000 within 90 days, that increase would blow through FHA's limit.

Investors who can document how much legitimate value they added would still pass muster, but they're likely to face tough scrutiny from lenders.

That's because most FHA lenders today are extremely nervous about getting sideways with FHA - which lately has been sanctioning lenders for rule violations and kicking some of them out of its programs altogether.

The challenge for investors focused on the returns on their investments will be controlling the sometimes high and unpredictable holding costs - which can range from "cash for keys" payments to tenants and former owners to ease them out of the properties, to insurance charges and even vandalism repairs.

On the whole the FHA policy change is going to open up foreclosures to many more FHA buyers and should help put a lot of houses back into the marketplace faster than before.