HUD "Flipping Out" over Flipping !!! - Posted by Todd (OH)

Posted by Dave T on December 06, 2001 at 09:09:49:

I completely understand, and I am well versed in the requirements and mechanics of a 1031 exchange. Glen (SoCal) provided a copy of the NAR protest letter which included 1031 exchange hinderance as one of the reasons for the protest to the proposed HUD rule.

I was hoping that Glen (SoCal) would have some insight behind the NAR’s reasoning in including this point in their protest. Since I am not aware of any valid reason for the proposed HUD rule to adversely impact an investor’s ability to participate in a 1031 exchange, the entire NAR protest loses credibility (for me) when even one issue is demonstrated to be without merit.

I just wanted to know if the drafters of the NAR protest letter knew something that I did not.

HUD “Flipping Out” over Flipping !!! - Posted by Todd (OH)

Posted by Todd (OH) on December 05, 2001 at 07:39:10:

Folks, read this as if your LIFE depended on it, because your LIVELIHOOD does!

First I will present the solution, THEN the problem. Although this subject has been broached before, this info should be an UPDATE for many of you. Hopefully it will also get some folks to take action that heretofore have not done so. Please take action on the following information not now, but RIGHT NOW!

The Solution

Contact HUD immediately by writing to them (typed OR handwritten) in the following manner:

Refer to the subject of:

“Proposed Ruling on: Prohibition of Property Flipping in HUD’s Single Family Mortgage Insurance Programs [Doc. No. FR-4615-P-01]”

Send ORIGINAL to:

Regulations Division
Office of General Counsel, Room 10276
Department of Housing and Urban Development
451 Seventh St., SW
Washington, DC 20410-0500

Send COPY to:

Hon. John Weicher
Assistant Secretary for Housing
Fed. Housing Commissioner Dept. of HUD
451 Seventh St., SW
Room 9100
Washington, DC 20410-0500

Content of your letter:

You should mention in your own words about how all the hype about so-called “flipping” is really “LOAN FRAUD” perpetrated primarily by INFLATED APPRAISALS. It is our constitutional right to purchase items (real estate) at a lower price, and sell at a higher price (whether extensive repairs are done or not) JUST LIKE EVERY OTHER AMERICAN BUSINESS! (Isn’t that the REAL secret that Victoria is keeping! :slight_smile:

During the Ohio REIA convention (November 2001), the group collected handwritten letters from people who took a few minutes to write something on the spot. These letters were sent to HUD en masse. HUD’s initial deadline to review public input has already passed (last month), BUT HUD IS STILL TAKING INPUT! Time is of the essence! Take action now!

The Update on the Problem

Last night I received a trobuling piece of HUD “Anti-Flipping” propaganda from a loan officer for one of the biggest FHA lenders in Ohio. If you do not have a copy of this “wartime leaflet” that HUD is dropping from the sky, please obtain one immediately so that you can see the brainwashing campaign first hand. You should be able to get one from your nearest FHA lender. Try to get a few to pass out to your investor colleagues.

This loan officer who shared the “leaflet” with me is an investor, goes to investor meetings, buys lots of courses and bootcamps, owns a few properties, BUT he is first and foremost a loan officer. As such he was prepared to quote (and justify, that’s the scary part) his mortgage company’s mindset of migrating to 6-month seasoning UNLESS you can verify substantial repairs.

While I almost always do substantial repairs, the point is that it is unconstitutional for them to dictate that my RIGHT to make a profit is contingent upon how much I spent on my kitchen cabinets!

When asking for this HUD “leaflet”, dated “November 2001”, the title is:

“Special Fraud Alert: FHA Mortgage Insurance Used in Property Flipping Scams”.

The next heading, in RED no less, following the title is…

“WARNING: Don’t Deal With a Flipper When Applying For a HUD Mortgage Loan”

HUD’s definition of flipping is:

“A flipper buy’s a house cheap and sells it for a price that’s much more than what the house is worth.”

Based on this definiton, if you are a scrupulous investor, you should AVOID THE TERM “FLIPPING” AT ALL COSTS! We are investors, real estate entrepreneurs, housing providers, landlords, etc. ANYTHING but flippers!

Folks this “leaflet” even has a toll free “800” hotline number for you to call if you think you be involved in a “flipping” scam!

I think you can see the TONE of this brainwashing propaganda that was sent out, with “perfect” timing, to poison the public JUST PRIOR to HUD making a decision on the proposed ruling.

NOTE: the finger is pointed primarily at the investor in this “leaflet” not at the Appraisers. As we all know, EVERY bank financed deal HINGES on the appraisal. Even if an unscrupulous investor wanted to scam somebody by INFLATING a sales price (lets say $150,000) FAR ABOVE WHAT THE NEIGHBORHOOD WOULD BEAR (lets say $100,000), he would be INCAPABLE of doing so when an ACCURATE appraisal came back with a value of $100,000 - $110,000. The scam is over immediately and NOBODY gets hurt. (Hint: That might even be good stuff to put in your letter to HUD, in your own words of course! :slight_smile:

Nuff said. Write HUD today.

Sounds like you’re flipping out too… - Posted by Bryan in Cali

Posted by Bryan in Cali on December 05, 2001 at 22:50:42:

Relax. If flipping is outlawed, find another tactic. I like lease options-no banks, no bureaucrats, just the seller, me, and the buyer-tenant. Or find something else. I prefer not to deal with the government in any way shape or form, since they do NOT have the interests of the small time investor in mind. Their interest is in the BIG boys who make BIG campaign contributions. Note that most of the “stimulus bill” tax breaks are going to the 12 biggest corporations in America. It’s obvious that HUD is getting nervous that flip investors are stealing its thunder, which is why you don’t want to depend on the feds for deals-get too successful and the feds freak out. IMO flips, like foreclosures, are way overrated.

Re: HUD “Flipping Out” over Flipping !!! - Posted by Rob FL

Posted by Rob FL on December 05, 2001 at 11:36:10:

The comment period to send a letter to HUD ended on November 5. I am not aware of any extension.

Re: HUD “Flipping Out” over Flipping !!! - Posted by Stan

Posted by Stan on December 05, 2001 at 11:28:47:

Now wait a minute. While I firmly believe that the government should not meddle in my affairs and tell me what I can and cannot do, I am also smart enough not to participate in government funded programs and then complain when my hand is spanked for not following THEIR mandates. Has our reputation as investors been tainted because of a few bad apples? I have to agree and say yes. There are unscrupulous investors, bankers, appraisers that are probably in bed with one another. And there may be some need for monitoring for activity of this sorts. Maybe not as far as the government is going with it now. But when we start to complaining when these reins are starting to be pulled in, I think it is a little childish. Come on now and find yourself a solution.

Again, as much as I hate to see this type of regulation, remember that this very program (among other government sponsored programs) do allow for some individuals that do not qualify for conventional programs a chance at owning a home. I am the first to say that I have sold many homes on FHA programs and made a lot of money. Now on the other hand, I am not going to slap the hand that ‘feeds me’ when they tighten their criteria. I find other ways to sell this proeprty. I almost laughed out of my chair when I read the above comment concerning the government infringing on the above’s right to make a living. You have got to be kidding me. They have not infringed on your right to buy and sell property. They have just said that the FHA will not insure the mortgage unless it meets certain requirements. Go to banks that offer programs other than government insured programs.

It is truly amazing that we have relied on government for so long that we allow ourselves to be paralyzed when these requirements pop up. My advice is to found other creative ways to sell your property.

Good luck.

Re: HUD “Flipping Out” over Flipping !!! - Posted by Carey_PA

Posted by Carey_PA on December 05, 2001 at 08:52:07:

I agree…I think everyone should at least take a minute to write a quick letter HUD.

I sent my letter last month and it didn’t take that long to write it.

CAREY

Re: HUD “Flipping Out” over Flipping !!! - Posted by JoeS

Posted by JoeS on December 05, 2001 at 08:42:22:

This “flipping” scheme is a problem, to sellers, buyers and lenders. Whenever there is the potential for big profit, there is the potential for big problems. BUT, if done correctly, honestly and above board, “flipping homes” is legal. Compare it to this: A body shop goes to a government auction, buys a $50,000 BMW SUV, wrecked, for $20K, invests another $5K into it to bring it up to as new condition, and sells it for $45,000!!! Who squaks? Nobody!!! The government held the auction, and the body shop did a legit deal. No one got hurt, someone got a good deal, and the body shop made a profit. NOW, try that with a $50,000 house, and HOLD ON! Big Brother comes breathing down your neck with FRAUD accusations!! Maybe what we need is LESS government regulation, and MORE privatization of the whole industry. My 2 cents.

Yes, Rob is right…I remember that - Posted by Carey_PA

Posted by Carey_PA on December 05, 2001 at 11:51:25:

November 5th deadline very well because I had to pay $13 to overnight my letter to mee the deadline! lol

CAREY

Re: HUD “Flipping Out” over Flipping !!! - Posted by Bryan in Cali

Posted by Bryan in Cali on December 05, 2001 at 23:00:35:

I agree. I’ve relied on SSI for way too long, for example. Relying on the government for your livelihood in any way is dehumanizing and creativity smashing. It is to be avoided at all costs. If you truly can’t think of another way to make a living at RE when your pet method is cut off then you’re just as bad as a welfare mother. (I’m waiting for the verbal assault now…)

Re: HUD “Flipping Out” over Flipping !!! - Posted by Rob FL

Posted by Rob FL on December 05, 2001 at 11:35:15:

Several mortgage brokers that I have talked to have said that they thought that if FHA mortgages went this way, the rest of the industry including FNMA/FHLMC conventional mortgages would probably convert to this 6 month policy. This would make the restriction valid on nearly all mortgages.

Re: HUD “Flipping Out” over Flipping !!! - Posted by Eddie

Posted by Eddie on December 05, 2001 at 10:41:08:

Did u ever close on that property where u were getting? LOL a closing date that was like 2 months in the future. Let me guess it fell thru

Some more info on the subject… - Posted by Glen (SoCal)

Posted by Glen (SoCal) on December 05, 2001 at 12:49:25:

First a question:

Most of what I’ve read says that the HUD was accepting input (letters) on the subject until last month, November 5th, 2001. Does anyone know if the HUD is still accepting input past that date?

In my albeit unseasoned, humble opinion, the HUD doesn’t seem to be aiming it’s PROPOSED legislation at the RIGHTEOUS investors on this board. The HUD is attempting to prevent the predatory practices of sub-prime lenders in collusion with ‘compliant’ appraisers who first fleece SELLERS of their property through stiff loans and foreclosure, then resell the property at an INFLATED ‘appraised’ value (not market) to a buyer using an FHA backed loan. The event leaves the FHA insuring a loan on an over-valued property, and the unsophisticated home buyer paying for it.

Unfortunately, the term ‘flip’ tends to include ALL activities related to ‘buying low and selling high’. So we get a black eye. However the HUD realizes there are legitimate reasons for below market sales and quick resales, and in it’s PROPOSAL describes these exceptions.

However, having said that, below is the NAR reasons for rejecting the PROPOSAL.

------------*****************-----------------------

That NAR oppose the U.S. Department of Housing and Urban Development proposed rule regarding the prohibition of Property Flipping in HUD?s Single Family Mortgage Insurance Program, [Doc. No. FR-4615-P-01].

While the directors understood HUD?s intent and do not condone the practice of flipping as HUD has defined the term, they felt that the rule would unfairly penalize the great majority of buyers and investors who are engaged in legitimate FHA transactions. Many members pointed out that flipping requires the participation of the FHA appraiser involved in the transaction and that HUD already has appraisal regulations on the books designed to deal with the appraiser who colludes with unscrupulous investors in such practices. Among the drawbacks to the proposed regs would be: 1) detrimental delays resulting from the need to get HUD approval for many legitimate rehabilitation projects that require less than 6 months to complete, 2) an unwillingness on the part of some investors to sell to FHA buyers as the result of the slowed down process, 3) potential complications for 1031 transactions and many special local housing redevelopment projects which would be in conflict with the guidelines specified, 4) an inability to specify all of the possible legitimate exceptions that might exist so as to avoid delays caused by the case-by-case approach and 5) the slowdown in the rehabilitation of city core neighborhoods. In general, it was felt that better enforcement of appraisal regulations already on the books would be a more productive approach to take.

----------------*****************------------------

Below is the HUD’s exceptions in the PROPOSED ruling:


  1. Exceptions to property flipping restrictions. While HUD wishes
    to assist FHA borrowers in avoiding predatory sales practices, HUD is
    also aware that justifiable circumstances may sometimes exist for the
    quick and profitable resale of a recently acquired property. HUD does
    not wish to prevent the ability to use FHA-insured mortgage financing
    for the purchase of properties acquired through such legitimate
    transactions. Accordingly, new Sec. 203.37a would authorize HUD to
    grant exceptions, on a case-by-case basis, to the proposed property
    flipping restrictions where the mortgagee demonstrates that the sales
    price of the property corresponds to its market value. Such
    documentation may include, but is not limited to, evidence that the
    sale price reflects a rapidly appreciating real estate market, that the

[[Page 46503]]

seller has made improvements that result in a corresponding increase to
the value of the property, or that the property is being sold at below
market value due to a distress sale or at a tax sale.
HUD invites comment as to whether these exceptions are sufficient
to avoid preventing or delaying legitimate business transactions. Such
transactions might include certain resales within 6 months at less than
the previous purchase price or certain resales at more than the
previous purchase price but less than market value.


To read the proposal of the: “Prohibition of Property Flipping in HUD’s Single Family Mortgage
Insurance Programs” see link below:

http://www.mbaa.org/industry/docs/01/65fr54186.html


Other links for articles concerning the subject:

Baltimore:
http://www.ci.baltimore.md.us/news/press/010511.html

Los Angeles
http://www.hud.gov/library/bookshelf18/pressrel/pr00-256.html

Oakland, CA
http://www.pacificresearch.org/oped/2001/01-09-05dd.html

South Carolina:
http://www.lpitr.state.sc.us/bills/122.htm

Re: HUD “Flipping Out” over Flipping !!! - Posted by CurtNY

Posted by CurtNY on December 05, 2001 at 12:04:25:

Hi Rob,
Its not likely, its actually the other way around, the industry usually follows FNMA/FHLMC as a guide. There are very few investors that follow HUD vs FNMA/FHLMC. Just my 2 cents

CurtNY

Re: HUD “Flipping Out” over Flipping !!! - Posted by Carey_PA

Posted by Carey_PA on December 05, 2001 at 10:49:17:

Eddie,

I don’t remember what property you are talking about but I’m closing on a sfh 12/27/01.

I’m not sure if that’s the one you are talking about or not??

CAREY

Re: Some more info on the subject… - Posted by Dave T

Posted by Dave T on December 05, 2001 at 16:48:14:

Could you please explain how the proposed HUD rule poses “potential complications for 1031 transactions”?

It is my understanding that “flip” property is not qualified to participate in a 1031 exchange, so this point does not ring clear for me.

yeah that was it nt - Posted by Eddie

Posted by Eddie on December 05, 2001 at 21:28:49:

nt

Re: Some more info on the subject… - Posted by BilLW.

Posted by BilLW. on December 06, 2001 at 06:39:48:

Dave T,
To the best of my knowledge, the reason flip property does not qualify for 1031 is that if you’re doing flips, then the IRS will consider this a dealer activity. If you have dealer status, then I think they have a rule that says these properties are not eligablefor 1031’s. There are also some other rules that you won’t like. ( Property considered inventory. All tax due on sale. No deferred taxes on deal if you use investor carryback. Things like that.) You might think about doing the deals inside your IRA. The profits might be more protected that way. If you check on the legal forum with John Hyre, I think you can get a more definitive answer. There’s also tons of stuff on dealer status in the archives.
Good luck,
BillW.

Hey Ronald Starr***! JohnBoy ! A question … - Posted by Glen (SoCal)

Posted by Glen (SoCal) on December 05, 2001 at 19:49:49:

Dave T-

I really don’t know why. Maybe someone will weigh in. Ill try to flag someone down.