Flipped Houses and Second Appraisals
So, you’ve been watching HGTV lately and thinking about flipped houses. It seems like everyone wants to get in on the craze of buying a house, making a few improvements to it, and then selling it for a huge profit. You begin to wonder; do all flipped houses require a second appraisal?
Well, this Q&A from the CFPB provides that “[i]f the home you’re buying is considered a “flip" and you’re getting a higher-priced mortgage loan covered… you will have to get a second appraisal.” (Emphasis added). Per the CFPB, a “flip” is when:
“You buy a home from a seller who bought the home less than six months ago and;
You pay a certain amount more than the seller paid for the home:
10 percent more if the seller bought the home within the past 90 days.
20 percent more if the seller bought the home in the past 91 to 180 days.”
The CFPB’s discussion is based on section 1026.35(c)(4)(i) of Regulation Z, which states:
“(4) Additional appraisal for certain higher-priced mortgage loans —
(i) In general. Except as provided in paragraphs (c)(2) and (c)(4)(vii) of this section, a creditor shall not extend a higher-priced mortgage loan to a consumer to finance the acquisition of the consumer's principal dwelling without obtaining, prior to consummation, two written appraisals, if:
(A) The seller acquired the property 90 or fewer days prior to the date of the consumer's agreement to acquire the property and the price in the consumer's agreement to acquire the property exceeds the seller's acquisition price by more than 10 percent; or
(B) The seller acquired the property 91 to 180 days prior to the date of the consumer's agreement to acquire the property and the price in the consumer's agreement to acquire the property exceeds the seller's acquisition price by more than 20 percent.” (Emphasis added).
Furthermore, as explained in the CFPB Appraisal Rule Small Entity Guide, if a member uses a higher-priced mortgage loan to purchase a flipped property, and the price increase exceeds the amounts specified above in section 1026.35(c)(4)(i), then the regulation requires the credit union to obtain an additional appraisal unless an exemption applies.
Here is an excerpt from the Small Entity Guide that provides the exemptions to the additional appraisal requirements:
“You do not have to order an additional appraisal for a covered HPML used to acquire the property from:
- A local, state, or federal government agency
- A person who acquired title on the property via foreclosure, deed-in-lieu of foreclosure, or other similar judicial or non-judicial procedure through that person’s exercise of rights as the holder of a defaulted loan
- A nonprofit entity as part of a local, state, or federal government program that lets nonprofits acquire title to single-family properties for resale from a seller who itself acquired title to the property through foreclosure, deed-in-lieu of foreclosure, or other similar judicial or nonjudicial procedure
- A person who inherited the property or acquired it through a court-ordered dissolution of marriage, civil union, or domestic partnership, or through the partition of the seller’s joint or marital assets
- An employer or relocation agency in connection with an employee relocation
- A service member, as defined in 50 U.S.C. appendix 511(1), who received a deployment or permanent change of station order after purchasing the property
You also do not have to order an additional appraisal for a covered HPML used to acquire a property:
- Located in a presidentially-declared disaster area during any time period during which the federal financial institutions regulatory agencies, as defined in 12 U.S.C. 3350(6), waive the requirements in Title XI of FIRREA and any implementing regulations in that area
- Located in a rural county (12 CFR 1026.35(b)(2)(iv)(A) and (c)(4)(vii)(H)), which are those counties located in the U.S. Department of Agriculture’s Economic Research Service Urban Influence Codes 4, 6, 7, 8, 9, 10, 11, or 12. The Bureau has published a preliminary list of these counties at http://www.consumerfinance.gov/blog/exemption-from-escrow-requirement-for-small-creditors-inrural-or-underserved-counties”
Overall, whether a flipped house requires a second appraisal depends on whether it is considered a higher-priced mortgage, and whether it falls under one of the exemptions mentioned above.
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About the Author
Tara Simpson, NCCO, Regulatory Compliance Counsel, NAFCU
Tara Simpson joined NAFCU as a regulatory compliance counsel in July 2022. In this role, Tara assists credit unions with a variety of compliance issues.