As the housing market continues to improve, we are seeing increased activity with respect to the purchase of residential units by investors.  Such investing is being utilized by large corporations as well as individuals with one or two investment properties.  In addition, house flipping, which experienced widespread popularity before the burst of the housing bubble, is also on the rise.  House flipping commonly occurs when an investor uses one of a variety of methods to purchase a distressed house at an amount less than the market value of the property.  The investor then rehabilitates the property by making repairs, remodeling, and/or updating cosmetic features and then sells the house for a profit in as short a period of time as possible.

A recent article in the Denver Post outlines proposed legislation targeting flippers.  Specifically, federal regulators have proposed a strict set of appraisal requirements that would, in certain circumstances, require lender’s to obtain a second appraisal.  Lenders who accept applications for higher-risk mortgages would be required to obtain a second appraisal in cases where the loan they are providing will finance the purchase of a property that was previously purchased within 180 days at a lower price. 

In the case where a flipper purchases a property and then attempts to sell it at a higher price within a short period of time the lender would be required to pay for the second full appraisal at no cost to the borrower.  In addition, the second appraisal would have to include an analysis of the reasons for the differences in the sale price such as changes in market conditions and improvements made to the property. Such legislation could create delays and increased costs for real estate investors.  The regulators believe that the proposed regulations are consistent with regulations imposed by the Federal Housing Administration.  Public comments on the proposed regulations are being accepted until October 15, 2012.

We will continue to monitor this proposed legislation and its potential impact. If you would like more information regarding your real estate investment properties, please contact our Business Law Group partner, David A. Closson at [email protected].

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