Is my agent trying to deceive me?

OP

Investor/Contractor · Moore, SC · Member since 2017 · 54 posts · 28 votes

9y

Update:

I was just informed that the reason the floors are going to have to be replaced before closing is because the $135k appraisal is accounting for new floors already. But the same question remains, Is my agent trying to pull a stunt here by trying to get me to cover this cost before closing? I feel that I shouldn't have to do that before the closing date. With the lower appraisal, is this a deal I should give up on? I've ran my numbers, and I can get about $400 in cash flow once I move out. Until then, I would only be paying about $50/ month for my mortgage once I get a tenant in.

Would love some advise on this one, thanks!

Sung Park

Rental Property Investor · Philadelphia, PA · Member since 2016 · 191 posts · 165 votes

9y

Ryan Davis it has to do with FHA. FHA loans have minimum standards that are stricter than conventional loans. If the bank originates your loan with a collateral that is likely in violation of FHA standards, they may lose the FHA guarantee when they try to sell in the secondary mortgage market. The bank does not want to hold the loan on its books but sell it to get its capital back. If it cannot meet FHA guidelines, its adverse for it to originate the loan.

5 Reply

Account Closed

Boston, MA · Member since 2016 · 50 posts · 34 votes

9y

FHA loans are more difficult to satisfy than conventional loans when it comes to condition of the property. There is a lot more risk for the bank when you put less than 20% down so they generally are more strict on the condition of the house in case of foreclosure. The minimum requirements for FHA are:

Safety: The home should protect the health and safety of the occupants.
Security: The home should protect the security of the property.
Soundness: The property should not have physical deficiencies or conditions affecting its structural integrity.

I would assume the bank wouldn't loan to you because the floors are unsafe and may lack structural integrity.

However I would definitely not start working on the house before you close in case it doesn't end up going through.

Sung Park

Rental Property Investor · Philadelphia, PA · Member since 2016 · 191 posts · 165 votes

9y

Ryan Davis why not have the seller pay for the flooring by hiring you as the contractor? That way, you get paid for the work if contract falls through, the house has your flooring if you move in and the bank can originate the loan.

5 Reply

Jim Adrian

Architect · Papillion, NE · Member since 2015 · 1k+ posts · 840 votes

9y

Is it too late to switch loan types to a conventional with 5% down and adjust the selling price? Then in the future you wont have problems renting both units out when you move out. I've heard FHA doesn't let you rent out both units if you don't live there as well.

Michael Cohen

Investor · Towson, MD · Member since 2014 · 472 posts · 257 votes

9y

Since it's a duplex (2-unit) he wouldn't be eligible for 5% down conventional. Max LTV on a 2-unit FannieMae is 85% - meaning 15% down minimum. Freddie Mac is 80%/20%

3 Reply

OP

Investor/Contractor · Moore, SC · Member since 2017 · 54 posts · 28 votes

9y

Thanks everyone for your opinion, I wasn't aware that FHA has those strict guidelines.

As the day has gone by, the selling agent has notified the seller of the low appraisal and he has come back with what he can do. He said that he can lower the selling price to $135k but not pay any closing cost. This is a big bummer to me as I don't have the cash to cover the down payment as well as all of the closing cost plus all of the repair cost that will go into it.

Think this deal is going to fall through to be honest. Oh well, what can you do. Gonna move past this one and keep searching.

Thanks for the advice everyone!

Wayne Brooks

Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes

9y

Sorry about the appraisal issue. But, it is not unheard of for a buyer to make some repairs in order to meet fha guidelines, if one trusts the seller, although of course there is some risk. I had a buyer do this on a house I was selling, I never touched it. Of course, I wasn't going to screw him and he Knew he qualified. You could always sign an an agreement/contract with the owner that if He doesn't close, when you are ready and able, that the work is to be paid for, thus you could file a mechanics lien if not reimbursed.

OP

Investor/Contractor · Moore, SC · Member since 2017 · 54 posts · 28 votes

9y

Originally posted by @Wayne Brooks:

Sorry about the appraisal issue. But, it is not unheard of for a buyer to make some repairs in order to meet fha guidelines, if one trusts the seller, although of course there is some risk. I had a buyer do this on a house I was selling, I never touched it. Of course, I wasn't going to screw him and he Knew he qualified. You could always sign an an agreement/contract with the owner that if He doesn't close, when you are ready and able, that the work is to be paid for, thus you could file a mechanics lien if not reimbursed.

That is a good idea, my only thought of that is this; say everything went south after all the work was performed, with filing the mechanics lien is this something I would need a lawyer for? I'm just thinking if everything went bad, I would hate to dump a lot of lawyer fees on top of rehab cost. Maybe this is just part of the risk but just checking.

Rental Property Investor · Proctorville, OH · Member since 2016 · 13 posts · 4 votes

9y

I would never consider making improvements to a building that I did not own yet under any circumstances whatsoever.

I think the error you made is in taking an FHA loan. FHA loans suck. For investors they doubly suck. In a situation like this, if you can't afford to put the necessary money down on a conventional loan instead of the FHA loan you got (and can't find a hard money partner), then I would say, oh well, you can't afford the property then and have to pass.

Wayne Brooks

Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes

9y

@Ryan Davis If you are a contractor, you should know your state lien laws and procedures inside and out.

OP

Investor/Contractor · Moore, SC · Member since 2017 · 54 posts · 28 votes

9y

@Wayne Brooks I am a handyman on the side of my day job. Don't do contracting work full time yet so not sure of the lien laws exactly.

Sung Park

Rental Property Investor · Philadelphia, PA · Member since 2016 · 191 posts · 165 votes

9y

Roan LaPlante I agree fha is great if it can work but sucks really bad if it doesn't. It helps to have the capital to go all cash or conventional if fha turns south. Having a strong cash position makes better options possible.

Irina Belkofer

Real Estate Broker · Cleveland, OH · Member since 2017 · 719 posts · 658 votes

9y

It happens all the time and not such a big deal.

Yeah, you're a marginal buyer but so what? You still can make it work, live in the duplex and rent it out, too.

Do what Wayne said and you'll be fine. You can file mechanic lien by yourself once you have a written agreement but mostlikely you won't have to - the seller wants to sell the house, not to get a free ride.

FHA loan is a bad thing mostly because their PMI doesn't go away when you have 80% of equity in the house, you'll need to refinance it - and that's another closing fees. However, it's a good way to start when you're expecting to make more money in future.

Talk to your agent, let her negotiate with the listing agent and close - after all, it seems like you'll have some cash flow and a tenant paying your mortgage. Not so bad......instead of waiting till you save on 20% down payment

Good luck!

[email protected]858-333-7597

Irina Belkofer

Real Estate Broker · Cleveland, OH · Member since 2017 · 719 posts · 658 votes

9y

Originally posted by @Roan LaPlante:

I would never consider making improvements to a building that I did not own yet under any circumstances whatsoever.

I think the error you made is in taking an FHA loan. FHA loans suck. For investors they doubly suck. In a situation like this, if you can't afford to put the necessary money down on a conventional loan instead of the FHA loan you got (and can't find a hard money partner), then I would say, oh well, you can't afford the property then and have to pass.

No kidding :)

Of course, it's better be healthy and wealthy than sick and broken - who wouldn't agree?

All people start from something and this is not the worse start ever. I know much worse stories and everything worked out just fine.

If he had 20%down and money for closing, he wouldn't ask that question, would he?!?

3 Reply

Dulce BeltranPro Member

Real Estate Agent · San Diego, CA · Member since 2017 · 99 posts · 52 votes

9y

Your lender/bank is the one that would impose flooring due to FHA guidelines and since there is "flooring" although bad this should not have any bearing on the loan being funded, as long as the carpet is there. Definitely do not improve the property until the deed is in your name, that will create a whole mess of other problems. Since it only Appraised for $135K and the contract is for $139K, the seller can add an additional $4K credit towards closing (must be used for closing costs so if your closing costs are only $5K, the remaining amount will go back to seller), or reduce the purchase price by $4,000. If you decide to move forward, you will have to pay that $4K out of pocket to the Seller as the Lender/Bank will only lend to the Appraised price of $135K. Hope this helps!

Matthew Olszak

Real Estate Broker · Chicago, IL · Member since 2015 · 1k+ posts · 2k+ votes

9y

@Ryan Davis In any other case, I'd say no repairs until its in your name. But you are working with an FHA loan, so it takes some flexibility on the "rules" to make this work. Consult your attorney (or read the contract) and see if the owner has an "out" after you do the work. Of course, even if they don't, a judge won't force them to close, but you'll at least get reimbursed for your expenses. If they don't have the out, I'd do the work, since that's the last roadblock from you getting to the closing table.

Have your agent lean on them that they if they don't accept your conditions, they likely won't find another buyer with FHA which could severely limit their buyer-pool. FHA appraisals stick with the property, and most FHA buyers need closing cost credits, so unless they are willing to go conventional or cash buyers only, they likely won't get a better offer from an FHA buyer. Check out the recorder's records and estimate their monthly payment - if the seller cancels the contract and the property sits on the market for 2 or 3 more months, how much has the seller lost in holding costs vs. what they would "lose" by selling at the lower amount to you?

Rental Property Investor · Proctorville, OH · Member since 2016 · 13 posts · 4 votes

9y

@Irina Belkofer if he doesn't have a good enough cash position, it would be irresponsible of me to suggest anything other that that he can't afford it.

Matthew Olszak

Real Estate Broker · Chicago, IL · Member since 2015 · 1k+ posts · 2k+ votes

9y

Originally posted by @Roan LaPlante:

@Irina Belkofer if he doesn't have a good enough cash position, it would be irresponsible of me to suggest anything other that that he can't afford it.

So then the alternative of paying rent and building NO equity is better? His biggest and also most-unlikely risks are a lawsuit and foreclosure, and both of those have no effect after a number of years. Rather than just sit and pay each month to build someone else's equity, I always advocate buying as soon as you can qualify.

I can imagine there is someone out there with much more money than you have saved who also feels you were a fool and irresponsible for purchasing without reserves at his/her level.

4 Reply

Rental Property Investor · Proctorville, OH · Member since 2016 · 13 posts · 4 votes

9y

Yes, I do believe that paying rent, building no equity, and saving some cash reserves is a better long term strategy. Having a no cash position on a house you are hacking is a very bad idea. A foreclosure puts you out of a home as well as the rental cash flow. If you get foreclosed on your nothing down SFR and you lose the investment, well it would be preferable to have some room in your budget, but worst case, fine, you lost your investment. You didn't also lose your primary residence.

I see that you do not agree. I appreciate you voicing your perspective.

1 Reply

Rental Property Investor · Proctorville, OH · Member since 2016 · 13 posts · 4 votes

9y

I seriously doubt it. I have never purchased an investment property that was not all cash, and I have never purchased an investment property that I could not afford to replace three times over with my own personal funds. That may someday change. Regardless, my standards for evaluating this situation are not nearly as high as what I have myself done.

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Joel OwensBusiness Member

Moderator

Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes

9y

The seller is likely playing games because they might think you have a lot of sunk costs into this deal and can squeeze you.

You might have to give it some TIME to let the seller see the light. Sometimes 1 week of time or more will cause the seller to cave in and do the deal. The real question becomes what is your market like? If this type of property is a (dime a dozen) then probably can find many other similar deals to work in your favor. If this property is a 1 in 6 month or longer type of thing coming to market in your area then options are more limited.

You mentioned handyman was a side job. What is your main job and annual income? You need to review credit and cut out high expenses and then conversely analyze your current job and what it is paying with potential for increases and advancement over the years.

If the job pays very little to keep up with living costs and inflation it will be very hard to get ahead and have extra capital when opportunities present themselves.

That is what helps me in that with commercial real estate I can make big chunks of money at a time with clients buying properties so I have cash to make investments. If I was making 75k a year versus 400k,500k etc. it would be really hard to take advantage of deals. So your regeneration of capital is key.

No legal advice given.

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