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This is a multi part blog on FHA loans.  I will be adding to this over the next few weeks.

What to know about FHA – Anti Flipping.

Unlike most conventional loans, FHA has unique requirements that prohibit the seller from having owned the home less than 90 days.  Attached is the  U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT MORTGAGEE LETTER 2006 -14

Property Flipping Prohibition Amendment

I suggest you read it and become familiar with it.  It describes that when writing an FHA loan as selling agent you should contact the listing agent and ensure the home has been owned by the same owner over the last 90 days.  If you are the listing agent, your seller will not be able to accept an FHA funded purchase if your seller has not owned the property for at least 90 days prior to contact date.

What is flipping:  Property flipping is a practice whereby a property is resold a short period of time after it is purchased by the seller for a considerable profit with an artificially inflated value, often abetted by a lender’s collusion with the appraiser. FHA’s policy prohibiting property flipping eliminates the most egregious examples of predatory flips of properties within the FHA mortgage insurance programs.

What is the sale date:  It is NOT close of escrow.  The resale date is the date of execution of the sales contract by the buyer that will result in a mortgage to be insured by FHA.  (See Mortgagee Letter 2006 -14 above Pg. 2)

Owner of Record:  The seller must also be the owner of record. Therefore you cannot “clean up the title” at close of escrow.  The seller must be on title at time of contract. (See Mortgagee Letter 2006 -14 above Pg. 2)

New Construction:  This rule does NOT apply.  Your buyer may use FHA funding on new construction.

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Exceptions?  Of course, this is real estate:  The rule does NOT apply to:

1.      Sales by HUD of its Real Estate Owned

2.      Sales by other United States Government agencies of single family properties pursuant to programs operated by these agencies.

3.      Sales of properties by nonprofits approved to purchase HUD-owned single-family properties at a discount with resale restrictions.

4.      Sales of properties that are acquired by the sellers by inheritance.

5.      Sales of properties purchased by employers or relocation agencies in connection with relocations of employees.

6.      Sales of properties by state and federally charted financial institutions and Government Sponsored Enterprises.

7.      Sales of properties by local and state government agencies.

8.      Upon FHA’s announcement of eligibility in a notice (i.e., ML), sales of properties located in areas designated by the President as federal disaster areas, will be exempt from the restrictions of the property-flipping rule.  The notice will specify how long the exception will be in effect and the specific disaster area affected.

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Please visit my other blogs concerning short sales:

December 21, 2007 at tgif-legal-tip-mortgage-debt-relief-for-foreclosures-short-sales

October 12, 2007 at tgif-legal-tips-financial-help-for-those-facing-foreclosure-short-sales-etc

August 17, 2007  at short-sale-reduced-commissions

and May 4, 2007 at tgif-legal-tip-short-sale-seller-perspective

The most similar to today’s blog is the May 4, 2007 entry where I discussed the Seller’s perspective.

From the listing agent’s perspective… let’s talk about how to handle and orchestrate a short sale.

First don’t forget the basics…remember again, prior to taking the listing and entering it in the MLS as a short sale review with our client how a short works.

Memorandum_Of_Warning_Concerning_Seller_Performing_A_Short_Sale 

Also protect yourself by amending the MLS Co-Op offering, “….Transaction … subject to …. upon bank approval; … compensation … will be reduced if the lender(s) reduce … commission…reduction to be split 50/50.”  See short-sale-reduced-commissions.

Once you do have an offer ….. and your seller accepts the offer, you should place the listing into the contingent “C” status within two days of the sales agreement being mutually executed (signed by all parties) while you wait for the bank’s approval and once you gain the seller’s lender’s approval, change the status to pending or “P” if all other contingencies have been met, within two days of receiving approval from the bank.  See MLS_Tip_2008-02.

You should have your Seller orchestrate the deliver of the offer and I suggest the fact that there is an actual opened escrow to the lender of the Seller as soon as you.  As discussed above, try to find out this contact of the Seller’s lender prior to receiving an offer to make good use of your time.

What if you receive an offer while the bank is reviewing your offer, you should let the prospective purchaser know that there is already an offer.  But they should know this as it is in C status.  You can inform the prospective purchaser that they are able to submit an offer, but it will be a back up offer, subject to the cancellation of the prior by the Seller and subject to the bank approval.  Your seller can entertain accepting this offer, but remember the Short Sale Addendum to Purchase Agreement  allows for a three (3) day first right of refusal, prior to your seller being able to accept such a back up offer and even open escrow, always subject to the prior being canceled by the Seller and bank approval. 

Can you send the offer to the lender?  Can you make the lender of the Seller aware that there is another offer?  Good question.  I telephoned the Nevada Real Estate Division at 702 486 4000 and asked this question and was informed that you can, in fact, inform the Seller’s lender of the other newly received offer and you can share the offer with the Lender.  I cannot find within the NRS, NAC, or REALTORS® Code of Ethics a guidance that prohibits the Seller or the Seller’s REALTOR® from disclosing information to the Seller’s lender. (Of course keep in mind Standard of Practice 1-9.  While it is true that this disclosure of a secondary offer may affect the Seller’s lender’s decision in whether or not to accept the first buyer’s offer.  But this is result of the offer being rendered subject to bank approval. 

3 day first right of refusal in the Short Sale Addendum to Purchase Agreement

The Buyer in first position, per the Short Sale Addendum to Purchase Agreement, has a 3 day first right of refusal.  ‘Buyer is informed that the property will be placed in “Contingent” status after the Purchase Agreement is executed, while the transaction is subject to Lender Approval. The Parties are informed that additional offers will be presented to the Seller.  If the Seller receives a written offer, which the Seller is willing to accept, the Seller will give Buyer written notice of the offer including the material financial terms and conditions and the Buyer shall have the right for 3 business days to meet the price and terms as contained in the third party’s offer.’

What about NAC 645.605(6)?   NAC 645.605(6) says each licensee must “deal fairly with all parties,” to the transaction.  I asked the NRED about this and was informed that NAC 645.605(6) does not say, it is improper to share with the Seller’s lender the fact that another offer has arrived.  Lets not forget the other side of the coin which is NAC 645.63.  All offers must be presented and once the Seller elects to share the new offer with the lender it must be done.  Also if there is a rejection of any offers this must be presented timely per NAC 645.632.

A short sale signed by a Seller is a subject to contract.  And the subject to is as powerful as the Buyer’s typical contingency of “financing.”  The Seller’s right to work with their lender, to share that other offers have been made must be viewed in the same way we respect the Buyer’s control of his/her financing.

As long as the sale is “subject to bank approval” the transaction is subject to twists and turns buyers are not used to and are not subject to in a transaction ‘not’ subject to bank approval.

See also the April 2008 MLS Terms of Use Memo from the Greater Las Vegas Association of REALTORS

gavel1.jpg I am getting questions on how a Chapter 13 affects a foreclosure?

Being the General Counsel of Prudential, Americana Group, REALTORS®, I do not practice in bankruptcy law and so I have asked this question of David Krieger, Esq., Haines & Krieger, LLC, 1020 Garces Ave., Suite 100, Las Vegas, NV 89101, PH: 702-880-5554, Fax: 702-385-5518, email: davkrieg@hainesandkrieger.com

David Krieger, Esq., says:

“Through a type of Bankruptcy called a “Chapter 13″ people can keep their property from being sold at foreclosure.  Quite often, filing a chapter 13 will also discharge (eliminate) any outstanding credit card debts, medical bills, payday loans and other unsecured debts.  In certain circumstances, a chapter 13 can even strip off (eliminate) a 2nd or 3rd mortgage.”

And I asked, “but what about Chapter 7?  Does that also assist arresting foreclosure?”

David says,

“Not really.  Chapter 7 doesn’t provide for a mechanism to cure pre-bankruptcy arrears.  Hence, chapter 7 is not a viable solution for saving homes in foreclosure.  However, a chapter 7 may be able to deal with any deficiencies resulting from foreclosed upon properties.”

“In order to be eligible to file a chapter 13, you must have regular income sufficient to support your ongoing Mortgage payments as they become due in the future.  You will also be required to make monthly payments to a chapter 13 trustee (who is a person appointed by the bankruptcy Court to administer the monthly payments).  Generally, through a chapter 13, someone who has fallen behind with their mortgage payments will make monthly payments over a course of 3 to 5 years to come current with their pre-petition mortgage deficiencies.  Upon completion of the plan payments, the mortgage is reinstated, the property is out of foreclosure and, frequently, all other personal debts are eliminated.”

“There are many misconceptions about how chapter 13 works.  Most of my clients (before they meet with me) think that they will have to repay all their debt.  This is almost never true.  The Bankruptcy system is set in place to help people in their time of need.”

“Also, many clients don’t think they will ever be able to purchase property or finance new cars again.  This is also untrue.  Not only will most chapter 13 debtors be able to purchase cars, homes, etc., in the future, but they are in better position to do.  Creditors lend based on the credit worthiness and other criteria of credit applicants.  When juxtaposed, a person in a chapter 13, who is discharging credit debt and reinstating mortgage terms is generally much more appealing than a debtor who has NOT filed bankruptcy still has significant outstanding debts such as defaulted loan/credit card obligations, mortgage deficiencies, etc.  To put this in further perspective, Creditors make lending decisions based on risk of default.  Generally, someone who in a chapter 13 for 12 months has established an ability to repay their ongoing debts, whereas a person who has not filed bankruptcy, but has bad debt outstanding has only demonstrated the opposite, an inability to manage their debt.  Accordingly, many of my clients are happily surprised when they receive offers for financing for new homes and cars within 12 months of filing a chapter 13.”

Altogether, Chapter 13 is very powerful tool for people who need financial assistance.  Unfortunately, clients of your REALTORS® are far from alone.  This real estate market has sent many people into my office who under normal economic conditions would never have dreamed of needing a bankruptcy attorney.  I meet with many clients weekly (including bankruptcy) seeking bankruptcy counsel, and generally this is the only option.  On that note, my clients often feel they are doing something bad, where in reality a Bankruptcy is frankly the most responsible outlet for most people facing the present dire financial circumstances.”