Why does a flipped house need a second appraisal?
A federal rule for higher-priced mortgage loans requires a second appraisal when the seller bought the home within 90 days and the price is more than 10% higher, or within 91 to 180 days and more than 20% higher. The lender pays for the second appraisal. Some jumbo programs add their own flip rules.
The rule exists to catch inflated flips
A flip is a house bought, fixed up and resold quickly. Most flips are honest. Some are paint, a new faucet and a price that jumped like it found a winning lottery ticket in the crawl space.
In January 2013, the CFPB and other federal agencies announced appraisal rules that added extra protection for buyers taking out higher-priced mortgage loans (HPMLs). The CFPB describes an HPML as a loan with an interest rate higher than certain average market rates. For those loans, a quick resale at a big markup triggers a second appraisal.
The thinking is simple. If the price rose a lot in a short time, a second appraiser should take an independent look. That protects the buyer, and it protects the lender from lending on a number that only one person signed off on. Two people can still be wrong, but they have to be wrong independently, which is a lot harder.
The 90-day and 180-day tests
Under 12 CFR 1026.35(c)(4), a lender making an HPML to buy a home needs two written appraisals when either test is met:
| Seller bought the home | Your price is more than |
|---|---|
| 90 or fewer days before your agreement | 10% above what the seller paid |
| 91 to 180 days before your agreement | 20% above what the seller paid |
Here is a hypothetical. An investor buys a house for $500,000 and signs a contract to resell it 75 days later. A resale above $550,000 crosses the 10% line. If the resale contract is signed on day 120 instead, the line moves to $600,000.
The rule also sets requirements for the two reports:
- They must be done by different certified or licensed appraisers.
- One must analyze the price difference, changes in market conditions and any improvements made since the seller bought.
- HPML appraisals must include a physical visit of the interior.
Who pays, and what you get to see
The CFPB says it directly: the lender cannot charge you for the second appraisal. The regulation puts it as the creditor may charge the consumer for only one of the two.
You also get copies. The CFPB says your lender must give you a free copy of all appraisals it obtained at least three business days before your loan closes. Read both. If they disagree, the reason is often in the part that analyzes the price jump.
For a buyer, that second report is a free second opinion on whether the renovation was worth what the seller is charging. It is one of the few times in real estate when someone else pays for a check on your behalf, so take advantage of it.
When the rule does not apply
The whole HPML appraisal rule does not apply to qualified mortgages, reverse mortgages, loans to finance initial construction of a home, bridge loans of 12 months or less, loans at or below a yearly dollar threshold, and loans secured by a boat, trailer or mobile home, among others.
Even when the HPML rule applies, the second appraisal is not required for purchases from:
- A local, state or federal government agency
- A lender that took the home through foreclosure
- Someone who got it through inheritance, divorce or a court-ordered partition
- An employer or relocation agency moving an employee
- A servicemember who got deployment or change of station orders after buying
- Properties in a rural county, or in certain federal disaster areas
Because qualified mortgages are exempt, many everyday buyers never hit this rule. That does not mean a flip gets a free pass. Lenders and programs often add their own.
Jumbo and program overlays add their own flip rules
Lenders can be stricter than federal law. Towne Mortgage's Core Jumbo guide is one example: it requires a second appraisal when a home is resold less than 180 days after the prior sale for more than 10% above the previous price, and it says the appraisal must specifically address the prior sale and justify the increase. Another section of the same guide allows a desktop review product as an alternative in some cases, so read the whole guide for your loan.
FHA has its own resale rules too, separate from the HPML rule. If the buyer is using FHA, read the FHA flip rules before the contract is signed.
Ask the loan officer at the start whether the program has a flip rule. Finding out after the inspection period is how a 30-day escrow turns into a 45-day one.
What to do if you're buying or selling a flip
- Sellers and investors: build the file. Permits, invoices, scope of work, before and after photos, and dates. The appraiser has to explain the price jump, so hand over the evidence.
- Buyers: ask the prior sale date and price. It is public record. Do the 10% and 20% math yourself.
- Ask your loan officer whether your loan is an HPML or carries an overlay, and whether a second appraisal is likely.
- Plan the timeline. A second appraisal can add days. Build them into the contract.
- Bring recent sales of renovated homes in the same area. Value comes from what buyers paid for similar finished homes, not from the cost of the work.
In my experience, buyers react to condition more than age. A real renovation can earn a real jump in value. But it has to be measured against renovated sales nearby, not against the receipt pile. A $90,000 renovation is not a $90,000 increase in value until the market says so.
Key takeaways
- The second appraisal rule applies to higher-priced mortgage loans, not every loan.
- It is triggered by a resale within 90 days at more than 10%, or 91 to 180 days at more than 20%.
- The lender pays for the second appraisal, and you get free copies of both.
- Qualified mortgages and many seller types, such as inheritance and foreclosure sellers, are exempt.
- Jumbo and FHA programs can add their own flip rules.
People also ask
What if the two appraisals come in at different values?
The lender decides how to use them under its policies. Some jumbo guides, like Towne Mortgage's, use the lower of two appraisals when two are required.
Does the 180-day clock start at the seller's closing?
The federal rule compares the date the seller acquired the property with the date of the buyer's purchase agreement. Your lender confirms the dates from written records.
Can the same appraiser do both appraisals?
No. Under the HPML rule, the two appraisals may not be performed by the same certified or licensed appraiser.
Sources
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