Financing a fix and flip through a traditional bank

[Jodi-Ann Bennett]

Hello All

I am a Newbie looking to do my first fix and flip in the New Jersey area and I currently have a property under contract. I am thinking about getting a loan from a traditional bank since the interest rates are not as high as the private money lender. My lender has informed me that if I get the loan and I sell the property under a year then this would be flagged and there could be some implications. So my question is, anyone used a traditional bank to finance the flip and sell in less than a year? Did you get in trouble for doing so?

Many thanks for your response.

Jodi

[Tim Rettmann]

Jodi - Loan officers often do a terrible job of explaining the different types of loans available, why those loans have different underwriting requirements, and why they will or won't work for different purposes.  They often don't ask the necessary questions.  Being a new investor, this leaves you having to figure out things on your own when the lender or mortgage broker really should have asked the necessary questions and given you the necessary explanation of loan options.

The key for you is to be sure to let any potential lender know the purpose of the loan and your basic plan with the property.  Buying the property in order to make it your personal residence is entirely different than purchasing for investment purposes in the eye of the lender/underwriter.  The lender may also view a fix/flip much differently than a situation where you will be holding the property long-term.  

If you make it clear what the current condition of the property is, as well as the basics of your short-term and long-term plans for the property, then any decent mortgage broker or loan officer should streamline the conversation so that you aren't wasting time talking about or applying for loans which are not appropriate for your situation.  

Also be aware that many mortgage brokers or loan officers have steered investors into loans which are inappropriate for the borrowers' investment purposes either because it earns them (the broker/loan officer) a higher commission or because they did not ask the right questions.  In such a situation, if you aren't asking questions and reading the fine print, you could unwittingly commit mortgage fraud.

My direct answer to your question is, yes, I have financed dozens of short-term fix/flips through what you refer to as "traditional" banks.  Most were small local banks who wanted to see investments in the local community made by someone with long-term, local interests.  Since 2007, it is much harder to get comparable loans, and it may not be a reasonable possibility for a new investor unless there is substantial other collateral to offer the bank.  

However, I think the better answer to your question is that you are not having the right discussion with the lender.  If the lender you spoke with understood that you want to buy, fix/remodel, and quickly sell the property, then there would be no need for discussion about "flagging" and "implications."  You will never "get in trouble" if you are honest and up-front about everything in discussions and in writing.  Don't trust any lender / mortgage broker / loan officer to look out for your best interests and protect you.  Communicate clearly, read everything, and don't sign anything unless you know what it says and it has the correct information.  

Bear in mind that every bank is different, as are the types of lending each can and will do.  Smaller, local banks may make loans that others won't.  They have their own goals and requirements for their lending portfolios, and those change over time for any given bank.  Sometimes you just need to talk to a lot of banks.  Get to know and develop relationships with the banks and people you like - personal relationships can help overcome barriers or streamline the process, although the loan underwriting requirements will still need to be met.  

I hope this helps.  Good luck!