Flipping with a Conventional Mortgage?!?!

[Michael Robinson]

Hello BiggerPockets Community.

Let me first apologize because I haven't done much research on this topic, which seems backwards but I will go back after posting this and dig through discussions (don't shun me please). I'm just so anxious that I couldn't help myself. 

I have my eye on a property that I think that has a decent upside to it. Due to not really knowing any hard money lenders or not feeling too comfortable with creative financing. I've opted to mortgage the property, put down my 20% and use the rest of my funds for rehab. Comparing the comps in the area, if done right it would be the larger of the properties up for sale or recently sold at the time of completion so I could be looking at a nice little profit for my first time. 

My question to the community is, is this a common way to start out flipping in order to gain capital for future deals? What things should I pay close attention to so that I don't get caught in a pickle during this process?

Also, if you know any one who may be able to suggest a decent mortgage broker that has worked with a first time borrower that would be awesome and GREATLY appreciated. (I'm fresh out of a credit rehab if that matters)

I have to move quickly on this too.. I noticed that the other comps were bought and flipped by the same guy, I'm just hoping he's waiting for one of them to sell before buying the one I'm eyeing. Thanks.

[Jeff Copeland]

While this is certainly feasible in some cases (and can be an inexpensive way to finance), there are some drawbacks and things to consider.

First of all, the home must qualify for financing (and insurance, which is required to get financing). In particular, conventional loans require the following:

• Roofs are required to have at least 3 years remaining life.
• Pools must be clean and operating.
• FNMA requires the comment, “Water and Power were turned on and operating properly at time of inspection.” on the appraisal.
• Heat is required, but not A/C
• Structural issues must be addressed
• Kitchen must have a working sink and cabinets.
• Don’t need appliances. Just hot water heater.
• Bathrooms must be completely functioning.

In addition to the above minimum inspection requirements, which are specific to conventional financing and verified by the appraiser, your lender will also require homeowners insurance. 

(Worth noting is the fact that conventional financing is generally considered the most lenient - FHA and VA requirements are even more restrictive)

Your insurance carrier, in turn, will have their own requirements. Here in Florida, these are generally satisfied with a clear "4-Point Inspection" - meaning the roof, plumbing, electrical, and HVAC are all functional and up to code. Check with your insurance agent to see what will be required. 

In addition to all of the above the home must appraise, in it's current condition, for at least the purchase price. Or put another way, the maximum loan amount will be based on the lower of either 1) appraised value, or 2) your purchase price. So if the appraisal comes in $10k light, either the deal is off, or you have to bring an extra $10k to closing.

Assuming the property meets all of the above requirements, your secondary challenge may be competing against cash offers. Cash purchases carry much less risk to the seller, and can close much more quickly and with much less hassle, and thus command a premium. 

By comparison, here is a typical "work flow" for a cash offer versus a financed offer:

Cash:

• Buyer and seller agree to terms
• Closing can take place in about a week, once title work is done

Conventional:

• Buyer and seller agree to terms
• Buyer applies for mortgage (which requires a mountain of documents from the buyer - last three years tax returns, bank statements, pay stubs, credit verification, letters of explanation, etc, etc)
• Lender orders appraisal - usually about a week to 10 days after the applications is received
• 10-14 days later, appraisal comes back. 
• Appraisal is reviewed. If appraisal is satisfactory, loan application is submitted to underwriting for approval. (at this point we're usually 30 days in)
• Underwriting comes back with a list of "approval conditions" - they can ask for just about anything at this point. Usually at least a final employment verification, updated pay stubs, updated bank statements. 
• Once final conditions are cleared, loan is "clear to close". 
• This entire process takes, on average, about 41 days.

So...from the seller's perspective. A $100k cash offer probably wins out over a $110k financed offer every time. There are just too many things to go wrong with a financed offer, which equals more risk to the seller.

Thus, it's not necessarily impossible. But it can be difficult, and in some cases just isn't feasible or realistic, to buy a true "fixer upper" with a traditional (conventional, FHA, or VA) mortgage.