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Updated over 11 years ago, 07/06/2013
Selling flip with significant price increase with little work done.
If I buy a house at a significant discount and do very little work, what problems might I run into when I try to sell again at market value within a month?
Here are the numbers:
ARV $185,000
Repairs $11,000
Purchase Price $70,000
This house is in probate and has not been on the MLS.
Does anyone have suggestions how to circumvent any issues that may arise with appraisals or lenders trying to nix the deal?
Good luck - I run into this all the time when flipping under 90 days. Even though technically FHA has lifted this ban, lenders still hate to large increases in prices. I am open to suggestions as well!
That is a great question...A cash sale, I believe, would be the best possible option. I don't think the guidelines matter if the buyer isn't being financed.
Another way to handle this would be seller financing. That way you can at least get a down payment and some operating income. The fruit comes in the final sale though, so it may be that this isn't the best scenario for you. Plus you have to hope the buyer follows through with the financing. While it's true they lose their deposit and any funds that have been applied to the principle balance on the loan if they don't follow through, they may never qualify (potential for more option money, longer term cashflow though)...
The only other thing I can think of would be to enter the deal while legally structured as a trust, then you could transfer all or part of your "beneficial interest" in the property for a fee. Not sure if this strategy works or is speculation, but that is advice I received from an investor in my area. I could be wrong as far as the sale of a rehabbed property, but this is advice I received on how to wholesale an MLS deal...Food for thought anyway.
Stuart Fox so what have you done when this issue came up?
I agree Jason Brooks that a cash buyer would be the ultimate. However I won't count on it as their are very few end users paying all cash.
Also not interested in holding a note or lease option.
Daniel Fisher - yeah, a quick financeable sale is pretty much out of the question, even with a local bank or credit union portfolio deal. If you have a track record, you could potentially solicit a private lender for an 18 mth note to bridge you to the 12 mth title seasoning you'll likely need. Might have to offer 12-15% to get the necessary term. Might find someone right here on BP. With as much spread as you seem to be working with, it's still a grand slam. Could put a carefully selected short-term renter in there for 6 mths to cover overhead, then do your repairs in the winter and list it next spring, targeting a signed contract at the 12-mth mark.
Of course, you can try to sell it for cash to a hedge fund after you repair it. It's on the high end of what they generally like to pay, and bearing in mind that they generally like props < 20 yrs in age.
I think you might be ok under $140k (200%).
But why don't you just wholesale it for $100k?
Originally posted by Phil Z.:
But why don't you just wholesale it for $100k?
Why should I sell for $140K which is substantially below market value? Shouldn't I be trying to maximize my profits?
I may wholesale it but won't the next guy have the same issues if I assign the contract?
David Beard
Originally posted by David Beard:
I like this suggestion but I was wondering if their is any way to get around it if I sell much sooner.
Originally posted by Daniel Fisher:
Why should I sell for $140K which is substantially below market value? Shouldn't I be trying to maximize my profits?
It depends...is maximizing your profits the goal? For me, maximizing my ROI/IRR and minimizing my risk are both more important than maximizing my profits. So, a quicker sale with lower margins is often better than a longer hold period with higher margins.
Btw, if you don't make a cash sale, I don't know any reliable way you'll be able to sell anywhere near market value to an FHA or conventionally financed buyer.
I agree that CHURNING the money and keeping it growing fast and liquid is key.
You could be waiting a long time on that big payday. The payday might eventually be larger, right on target, or smaller than you thought. When you turn the money now you know exactly what the market is doing and your exit.
- Joel Owens
- Podcast Guest on Show #47
Originally posted by J Scott:
Lenders won't take into account a distressed situation? Or that the house didn't get MLS exposure?
Their are very good comps to support the stated ARV.
Originally posted by Daniel Fisher:
Lenders won't take into account a distressed situation? Or that the house didn't get MLS exposure?
Their are very good comps to support the stated ARV.
FHA underwriters will not...
Originally posted by Will Barnard:
Will, most agree that bank underwriters will balk at a 100%+ markup on a quick flip with very minimal rehab done. Do you disagree?
I simply suggested he try to get a longer-term private/HM loan, to enable him to hold the property for 12 mths to get the necessary seasoning that these bank/FHA underwriters like to see.
Is that clear?
Basically all post here are correct. The original issue was brought up by the ever ballooning prices we had some years ago leaving the market with highly over inflated values and lenders with loans that they ended up foreclosing on and taking a huge loss on.
At that point the government sponsored entities, Fannie, Freddie, Gennie Mae, and also FHA and UDSA revised their guidelines to say no financing available for flips with large market increases when the rehab costs cant justify the price increase. They started out at 12 months, then 3 months, then the ban was lifted.
The issue that your dealing with is even though FHA has lifted that ban, then lenders who sell to these entitys have lender overlays and so they dont want to get caught holding the bag if the entities wont buy these loans, so the lenders wont make the loan. There is the sticking point.
Basically for that level of price increase, you will have to get past the 12 month mark. You can do this by holding to that point, or if you insist on a quick sale, you will most likely have to come off the full market value enough to attract a cash buyer.
You may be able to increase your odds if you can connect the buyer with a private money lender. A lot of private money lenders use their IRA's to fund loans, look where you can find IRA money, or other retirement type money. I also know of private money from people with large cash values in a whole life policy, or business owners flush with cash looking for a good investment. Other than that, I'm at a loss as to other options?
I have heard of a somewhat similar situation where the buyer had VA financing. The rehabber was required to get an appraisal by his HML and the house "prerehab" appraised for significantly more than purchase price. The VA underwriter used that appraisal as the FMV of the house before rehab.
My question is, do FHA FNMA USDA ect use different guidelines than the VA?
J Scott do you get appraisals of your rehabs? Have you tried this approach?
Originally posted by Daniel Fisher:
My question is, do FHA FNMA USDA ect use different guidelines than the VA?
J Scott do you get appraisals of your rehabs? Have you tried this approach?
I haven't done many sales to VA buyers (just because VA buyers make up a relatively small buying segment), so I don't know how VA underwriters do things. So, I can't speak to that...
But, I don't believe that FHA and conventional underwriters will consider a seller-initiated appraisal in lieu of that previous purchase price when evaluating flip criteria.
Regardless, being successful at any of these things seems unlikely, and I wouldn't suggest hinging your entire resale strategy on the hope that an underwriter is willing to be lenient or accept documentation other than the previous purchase price. While it may work occasionally, far more often it won't, and you'll be left holding a property without a plan.
If I were you, I'd either:
1. Wholesale the property to a cash buyer;
2. Buy, hold and wait 12 months to resell.
Can someone clarify something for me, is this for all types of properties, or just single family homes that you will see these issues with a quick sale? Would a 2 family with rents that could justify the price would be ok on a quick flip with 100% profit?
Originally posted by John H.:
It has less to do with the type of property and more to do with the type of loan. This would apply to any FHA or residential conventional loan.
Originally posted by J Scott:
Originally posted by Daniel Fisher:
My question is, do FHA FNMA USDA ect use different guidelines than the VA?
J Scott do you get appraisals of your rehabs? Have you tried this approach?
I haven't done many sales to VA buyers (just because VA buyers make up a relatively small buying segment), so I don't know how VA underwriters do things. So, I can't speak to that...
But, I don't believe that FHA and conventional underwriters will consider a seller-initiated appraisal in lieu of that previous purchase price when evaluating flip criteria.
Regardless, being successful at any of these things seems unlikely, and I wouldn't suggest hinging your entire resale strategy on the hope that an underwriter is willing to be lenient or accept documentation other than the previous purchase price. While it may work occasionally, far more often it won't, and you'll be left holding a property without a plan.
If I were you, I'd either:
1. Wholesale the property to a cash buyer;
2. Buy, hold and wait 12 months to resell.
J Scott have you gotten an appraisal in a case like this and tried this approach?
I too would not hinge my entire resale strategy on hope. But I'm wondering if there are people that have done this and didn't have success with it. Or is it that nobody has really tried this method?
At any rate, if I do resell at $140K rather than $185K I still stand to make a great profit. Or doesn't it work to just drop the the price by $45K if the underwriter balks about the sale price?
Also, if say I do wholesale this to another flipper, won't he run into the same issue?
Originally posted by Daniel Fisher:
J Scott have you gotten an appraisal in a case like this and tried this approach?
Nope. Though again, I don't imagine it would matter with an FHA or conventional loan. I don't know about VA...
For FHA, it's going to be more of an appraisal issue. You'll likely be able to sell it for whatever the appraiser says it's worth, but the appraiser will probably not say it's worth more than you paid for it if you haven't done any work and little time has passed. And even if the appraiser does raise the value, the underwriter can do whatever they want -- it's their butt on the line if the loan can't be sold.
For conventional, I believe they have some formulas they use for how much you can sell it for based on how much you bought it for and how much you put into it. But, I don't know the details.
If he tries to resell to another FHA or conventional buyer? Absolutely. In fact, he'll have more trouble reselling because of the extra title transfer.
So I guess another solution would be to just tell the seller that I screwed up. And offer her more...
Originally posted by Daniel Fisher:
Not sure how that improves your situation...
Just a thought of using percentages and if I have a higher base then I could stand to profit more on the bottom line.