Can do the deal with FHA End Buyer BUT....

Question

....the lender is telling me I can't make more than 20% in the deal.  They know there is a waiver for that but they don't have investors who will buy their loan if they do that.  Sooooo, should I:

A) Forget about them and move on and list the property for cash or conventional only?

B) Just take less and write the contract with me only making     
    20%?  The problem is that the 20% is off the sale price according to the lender, and the buyer's need 6% in closing cost help which would have me making like $8-10k.

C)  Some other option that I don't know about???

I know there's a way to do same day closings using a land trust, but I already have everything with motion with this bank using myself as the buyer.  Also, I have a local credit union that can do conventional for only 3% down, but they only allow 3% in seller's assistance for closing costs.  Is there a legal way to get the buyer their other 3% somehow?

Separate question...I've seen this debated a few times on here already, but not very much.  Are you guys immediately marketing your properties for resale once you sign a contract with the homeowner and submit the package to the bank?  Or are you waiting until you have an approval for your short sale and then marketing?  This lender I was just speaking with is telling me I need to have the bank approval before I list on the MLS for resale.  Of course I have permission from the homeowner to immediately market their property for resale.  I'm experimenting two way to see what works more efficiently:

1)  I'm listing the property as Pending just below my offer price.  Once the BPO is done and I'm close to an approval I have to seller withdraw the listing with the listing agent, and relist at our resale price.  This is the pretty listing and it shows up as being brand new on the market.  This is what I did for my questions above and got this offer in 2 days, but am running into the FHA problem.

2)  I'm listing the property as ActivePending just below my offer price.  I am about to do that tomorrow for this first time to see if I get backup offers or not.  I don't know if I'll get them high enough to still buy from the homeowner and resell to the end buyer.  I will tell agents who call that there's an offer in that is likely to be accepted and that we are taking backups.  The buyer will be reselling the property as 'X" dollars (my resale price) and you should take that into consideration when writing an offer if you want your buyer to have a shot at getting it.

Can you guys critique this for me and tell me what you think is the best route to go.... or is there a better one?  I'm getting close to approvals on my first 4 or 5 deals and I want to make sure I'm using an effective, legitimate method that is all above board.  Thanks!

Scott Hubbard · Answer

FHA underwriters are very tough to gauge these days.  If you did not already know, FHA underwriter's have a special certification and they are generally the busiest of all underwirter's because they can always do conventional as well.

Since they are the busiest, they will not hesitate to kick out a deal that they do not feel comfortable with.  So, the hoop jumping that James refers too is really true.  The underwriter's will throw up road blocks and you will have to work a little harder.

I personally stay away from FHA end-buyer's for the simple reason they are the least performing of all types of buyer's.  They also require the highest amount is seller concessions.  Lastly, the properties need to pass an FHA inspection which can cost you additional monies in repairs and modifications.

My advice to anyone is price the property to sell quickly to a cash buyer or conventional.  In the end, it all balances out in terms of returns.  If you sell to a cash buyer, you at least no your discount upfront.  If it is a conventional, then you will have to wait until after the home inspection before you can to account for your spread.  As for FHA, you will only know your spread at the very end because the costs seem to mount daily.  In my opinion, jumping through hoops is very costly and in the end, i believe you will make more if you spend less time on each deal.

James Ward · Answer

If you are Selling to a FHA buyer and you are going to sell it for more than 20% of what you purchased it for, you need to be prepared for the following:

1) A SECOND appraisal.  The Seller most likely will need to pay for this.
2) A home inspection.  The Seller will likely need to pay for this.
3) Title company being able to convey to the underwritter what is happening (this applies if you are doing a double close.).

Folks you can sell to a FHA Buyer with a 20% or greater spread.  But, you MUST be prepared to jump the hurdles.  And there are going to be several!  If you have any questions about this, read the FHA guidelines.  If you do not understand them, have an attorney (real estate) or talk to a title company.

Scott Hubbard · Answer

Why is anyone dictating to you how much you can make? I have done a lot of negotiations and I have never been told this.  I find this puzzling to me.

In this business, you need to be able to make be prepared to make $8 or $10K.  It is a volume game and the goal is to complete deals not hit a home run everytime.

In my opinion, I would rather lower the price by 6% then stick my neck out for an FHA buyer.  They are the most fickle of buyer's since they usually have no money and often their credit is borderline.

You need to be aggressive in your pricing and be the lowest price in the neighborhood.  Sometimes the subject property location or the price makes it attractive for FHA buyer's, but your much better-off looking for a cash buyer even if you have to reduce the price.

First of all, your not going to make 20% after closing costs, commissions, and finance fees.  Secondly, the lender should be the last one who knows what the property is worth.  Thirdly, FHA requires 3.5% down not 6%.  I would check this out.

I would only write a contract with a FHA buyer if I have exhausted all efforts to market to a cash buyer first and a conventional second.

If your only option is a FHA buyer, try to at least get a large EMD (though this is a challenge for an FHA buyer).  Also, you need to be prepared to buy and hold for two to three weeks.

Go A to C if you cannot find a buyer and collect a fee from the agents.

Stay away from land trusts in dealing with short sales.  They create as many problems as they solve.  Most lenders will not even agree to a short sale if a trust is involved.

There are ways to do this but you need to be very careful.  Check with the CU's underwriter to see if the borrower can be gifted a down payment.  If so, you might work something out with a relative of the borrower.

As for lenders requiring a listing agreement, this is very common.  One possibility is to do exactly what your doing.  Another is to have the agent on your team create a listing agreement as a pocket listing meaning that it will not be entered into the MLS.  Once the BPO is done, then have the agent on your team list the property for the B to C buyer.

Many lenders are requiring the properties be listed prior to agreeing to a short sale.  Give them what they want.

Scott Hubbard · Answer

If you are contracting directly with an FHA buyer, then I agree with your lender's statement.  I thought you were saying the lender on the A to B was saying 20%.
          
          Yes, this is true with the 20%.  But, if you get a conventional buyer or cash buyer, then the 20% does not apply.
          
          Also, if your buyer is requesting 6% in assistance, then you are correct, they are not very solid.  In this case, you can counter their offer and increase the EMD to 7% of the Purchase Price and this usually keeps them out of the picture.

Account Closed · Answer

To add to Scott's posting on FHA underwriters they are certified and also face the risk of having non-performing loans appear on their record.  That is why the FHA underwriters are so stringent upon their underwriting.

Since there is only prime, FHA, & VA available in terms of mortgages the volume of mortgage business has shifted to FHA due to the high LTV's and low down payments.

I agree with Scott to avoid FHA buyers initially if you can build up the cash buyer list.

David H.

Vikram C. · Answer

This is great information, Scott.  I wish I had know about this a couple of weeks back.

The problem I had was that the property that I have is worth about $150K ARV and I am told that the majority of buyers in that price segment are FHA buyers and if I were to not accept the offer, it would have taken a long time before I could sell it.  I got 3 full and above full-price offers within 24 hours of listing the property and all three were FHA buyers.  They all wanted 3% in seller concessions and this further increased the selling price because I wanted the concession to come out of their pocket and not mine.  The higher price further increased the percentage difference between my purchase price and the selling price, thus making it less likely that this thing is going to close.

The good news is that the buyer has an escrow closing date of March 31st so hopefully, in a couple of weeks, I will either have the cash or be able to do this again and exclude FHA buyers.

Craig Grella · Answer

Just a few thoughts, as some other people have commented well.

I won't comment on what percentage profit you should make. You need to figure out if that number fits your plan.  However, regardless of what percentage the bank says you can make it all comes down to a number they will accept or not accept. Below that number the deal doesn't work. You might try to approach it by finding out what that number is. If they're pregnant with you as the buyer you might have the ability to push it a bit and if they don't go for the lower number (more profit for you) then you can probably still raise the offer to their original counter and close the deal if it makes sense for you.

I maintain a buyers list of potential buyers in my area for residential and commercial property. If this is your first deal you may not have a host of buyers ready yet, but you should start to build that now. When you have a deal where the numbers work you can market that as soon as you have mutual agreement on a contract.

Larry Moore · Answer

The 20% profit rule when selling to FHA buyers only applies to loans where the seller has been on title less than 90 days at closing, correct?  Or, have they expanded the 20% limit to all FHA loans, regardless of time on title?

Art Jackson · Answer

On your A to B transaction add a 6 % seller assist.  This will allow you to make 26% as opposed to 20%.  Second,  On an FHA "C" buyer you can make more than 20%, however anything over 20 opens up additonal steps that the lender is required to do in order fo the transaction to occur.  If you can wait longer than 90 days of ownership, you eliminate this 20% all together.  I hope this helps.

Can do the deal with FHA End Buyer BUT....

Most Popular Reply