Would Flippers/Rehabbers weigh in to offer guidance?

[Jody Michelson]

Have you ever had a lender tell a prospective buyer of one of your flips that within the first six months of you purchasing, rehabbing and listing the property, they (the lender) wouldn't loan on a property that was selling at a price considerably more than what the seller (you) paid for the property in the first place? And that for the time frame of between six months to one year from your original purchase, rehab and listing of the property that the lender would consider a loan on the 'substantially increased purchase-vs-sale price' property only if you could justify the asking price via receipts for upgrades that were done?

I ask for the following reason: I've been principally a buy-and-hold investor who's had their sights on eventually doing a handful of flips each year once I felt I had acquired enough of a knowledge base to go about it in a confident manner (confident for first flips, that is :)).

I was speaking with the RE agent who helped me purchase a few properties recently to go over what I hoped to be a timeline for rehab and listing the properties for sale. Within a day, the agent said they spoke with lenders who offered the caveats mentioned in the opening paragraph of this post (about the 'no lending for the first six months, and only with proof of enough value-added for six months to a year) for properties that were purchased for far less than they'd be sold at.

If this is even slightly accurate (and I have some questions as to the veracity of the claim), then with the exception of cash end buyers, how could rehabbers do business? I would have thought that lenders would only be concerned with the credit-worthiness of the borrower and the market value of the underlying collateral, and not how much the original purchaser (flipper) paid for the property?

I'd love to get BP Nation's feedback on this, as I consider the experience and expertise to absolutely dwarf that I'd get from a typical agent or loan officer.

Many in-advance thanks!

[J Scott]

Let me clarify some things:

- There are different types of loans/lenders out there, and they will all have their own rules. Specifically, FHA is going to be different than VA which is going to be different from conventional which is going to be different from portfolio lenders.

- For FHA, the rules are pretty much the same for the first 6 months you've owned the property. During this time, most lenders will say that you can sell, but that you need to justify the increase in price from purchase to sale if the increase is more than 20% above purchase price. To do that, they'll often ask for a breakdown of rehab costs (and perhaps receipts) and two appraisals. After 6 months, most of the extra requirements go away. Also note that some lenders will flat out refuse to do FHA funding with 3 months of the seller's purchase -- ask you mortgage broker to verify this with the underwriter before you sign any sales contracts.

- For VA, there are no specific timelines that I'm familiar with. The value will need to be justified via appraisal, and you'll be subject to a pretty rigorous inspection by VA inspector/appraisers and will likely have to do a lot of minor repairs required for underwriting.

- For conventional, there are specific guidelines and formulas for resale within 6 months. I haven't been able to get any underwriters to provide me these guidelines/formulas, but suffice it to say, if your increase in price is reasonable given the amount of rehab you did, you should be okay. You will likely be required to provide a rehab cost breakdown and receipts.

- For portfolio lenders, there typically aren't any restrictions, but every portfolio lender will have their own guidelines, so you'll have to check with the mortgage broker and/or underwriter to be certain.

All that said, I've sold dozens of properties in under 3 months and many dozens in under 6 months, so it's certainly possible and it shouldn't deter you from jumping into the business.