In the last couple of weeks great sounds of celebration have been heard in the real estate investing world based on a change in rules from the FHA. New rules have opened up FHA borrowers to the properties for sale by investors who have acquired a foreclosed property, and then made repairs to make it habitable and to FHA standards. In the past, there was a 90 day rule that added costs for investors and made it less likely one of these properties would be available for an FHA buyer. This rule change can be such a big deal becasue today FHA is the home lender of choice, with approximately 60% of all owner occupied homes being financed with loan and a FHA guaranty.
The issue I have with this improvement in the rules is that there is a 20% cap on the difference between the investor’s acquisition cost of the foreclosure and the price paid by the new buyer. I know what those friendly to capitalists folks running our government were thinking. “Wow..I sure would like to make 20% return for such a short term investment.” Obviously, they still have not visited a foreclosed home.
Lets just start with the basic idea here that an investor, who buys an as-is foreclosed home is taking some pretty serious risk and should get some return for the risk. It is not unreasonable to consider 10% is the low end of the risk-return ratio that makes this investment make sense. So, this leaves 10% of the acquisition price for rehab to make the home eligible for an FHA buyer.
Most of you already see where I am going at this point. Very few foreclosed, REO homes, only have 10% of cost in their budget for repairs needed to qualify. It will be a rare property where this formula will work. The folks at HUD have the right idea, but all I can figure is they really do not believe an investor should be allowed a 10% return for this risk.
Take a look through our website www.WilmothGroup.com and look at the properties for sale. We only put on the decent pictures, leaving many of the really ugly defects to be inspected with the eye. With the right investment, most of these houses can be a home again. It will likely take investments much greater than 20% and an investor would be crazy to not demand some return for their risk.
This idea shows progresss toward removing the roadblocks to capitalism that can solve a lot of our nations problems. Unfortunately, a zebra does not change its stripes and the concern that somebody might profit seems to have interfered with implementing the rule so it truly can have a positive impact on FHA borrowers and neighborhoods languishing in foreclosed, vacant properties.
