By Caitlin Coakley
CHARLOTTE — Tom Latimer remembers last summer, when his company, Tomika Investments, took possession of a house and spent a month doing renovations. They put the house on the market in August, had a buyer lined up by September and finished paperwork and inspections by November.
There was one problem: Since the buyer was financing with a Federal Housing Administration loan, both parties had to follow the FHA regulation that an investor must own a property for 90 days before re-selling it.
“We had a willing seller and a willing buyer that could not perform an act until that regulation had met its course, and it did nothing at all,” said Latimer, who is president of the Metrolina Real Estate Investors Association (REIA). “It didn’t protect the buyer, it didn’t protect the seller … now you’re sitting with a stopwatch waiting for the 90 days to expire.”
As of Feb. 1, the FHA has lifted the 90-day requirement in an effort to reduce the number of foreclosed homes crowding the market.
In the past, the requirement was a burden to investors who thrived on buying fixer-uppers, renovating them and reselling within a few weeks. But investors have mixed predictions on the effectiveness of the new rules.
“The key to recovery right now is getting the foreclosures off the market,” said Tony Brown, principal broker for Realty World.
The 90-day requirement, enacted in 2006, was an effort to hinder unscrupulous investors who bought homes on the cheap, particularly foreclosures, and sold them at inflated prices after making cosmetic repairs — or no repairs at all.
Deanna Valeo, a mortgage consultant and director of vendor services for Metrolina REIA, said first-time homebuyers were especially vulnerable to such transactions.
“Typically … they’re too naïve to know that you should have an inspection, to make sure that they don’t have termites,” Valeo said. “They don’t know how to negotiate a deal. They don’t even know if what they’re buying is worth what the market is worth.”
The 90-day rule was intended to weed out illegitimate investors, she said.
In addition to lifting the 90-day rule, the FHA has put additional regulations in place to make sellers more accountable: capping investors’ profit at 20 percent above the acquisition cost unless they document all repairs, obtain an inspection and justify the selling price through two lender-selected appraisers.
The agency has not determined whether these regulations will continue when the 90-day requirement is reinstated next year.
Dante Mazyck, acquisitions manager for House Buyers of Charlotte, said he bought and sold houses for profit from 2004 to 2007, but stopped when the rules became too constricting.
“First-time (FHA) buyers, they were the biggest pool of buyers for us, and that’s really why we stopped,” said Mazyck, adding that he now is considering getting back into the business.
If an investor buys a home and intends to resell it quickly, he typically looks for an FHA buyer rather than someone with a conventional loan, which usually will be subject to a requirement that the owner have held the home for at least six months.
But selling buyers on FHA loans could get more difficult when the agency increases its up-front mortgage insurance premium from 1.75 percent to 2.25 percent in April.
Venture Realty owner Larry Thompson, who said 60 percent of his clients are FHA buyers, said he is reluctant to encourage buyers to use one kind of loan over another.
“There are ways out of all of that, but from a sales perspective, it’s not going to be good for me to tell a prospective buyer what they’ll have to do to buy my home,” he said.
Thompson said he doubts that suspension of the 90-day requirement will help the market. In fact, he suspects the push for FHA loans may do more harm than good.
“It’s basically the new subprime mortgage,” Thompson said. “These people could not have afforded the house without FHA, which honestly, I think, is what is going to keep us in this downward turn. These houses are going to keep turning over because they never should have been approved to begin with.”
Brown, however, believes the waiver will get decrepit properties off the market.
“It’ll help the market as a whole because right now, the market can’t pick up because there are so many homes with work to be done,” Brown said.
Mazyck said he believes most investors will be happy for the change.
“You may have some that try to exploit it, but for the most part, people are happy that the rules have been lifted and they’re going to do whatever they can to try and keep them lifted,” he said.