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.

[Michael Robinson]

@Jeff Copeland Thank you for that break down. 

Seems I was a bit nieve counting out other financing options. I've started reaching out to a few mortgage brokers to see what sort of mortgages would fit in my situation but with everything you've explained here I bet the list is REAL short if any. I know for a fact that one of the bathrooms isn't in working condition but I'm not sure they listed it in the property description. 

That puts me in a real pickle. Even if wanted to look at hard money or any other sort of financing option I'm behind the 8-ball. I haven't directly flipped only through shadowing family members who used their own money.

I would hate to see this deal pass me by considering I know there is about 30-40k worth of profit in there.

[Paul Bowers]

What about partnering with one of those family members? They provide the cash you provide the deal and run the flip. Split the profits. Half of something is better than all of nothing.

[John Thedford]

Your other option is a hard money loan. They are typically expensive. If the number work in that scenario, you may be able to find a HML that will fund most of the deal. The idea expressed by Paul Bowers is also a great option. Family members can't earn anything having cash sit in the bank. So, if you can get money from them, say at 6-7%, that is far cheaper than a HML and will help you work the deal.

[Andrew Postell]

@Michael Robinson I would state that there are 3 types of money to use for flips:

1. Cash/HELOCS/other private financing
2. Hard Money Loans
3. FHA/Conventional Renovation Loans

So if you have a home that is in a "challenged" state a traditional mortgage won't be feasible.  A traditional mortgage would need the home to be "move in ready".  So we are limited to the 3 methods above.  There are pros and cons to everything though...cash, well, not everybody tens of thousands of dollars just sitting around.  Hard Money, they can close quickly BUT you cannot lend on a home you live in. FHA/Conventional Renovation loans can wrap the renovation costs into the loan but they do need a 30 day close.

Do you think you could use a FHA/Conventional renovation loan on the property you were speaking about?

[Michael Robinson]

@Andrew Postell I'm not to familiar with the FHA/Conventional renovation loan process or requirements but I would think this property is eligible. The house is selling for half the price of the other houses in the neighborhood, so I think the equity is there. I'm meeting with a mortgage broker tomorrow and I'm hoping he can explain or even offer this sort of loan.

[Michael Robinson]

@Paul Bowers I took your advice and I'm pitching the deal to a family member to see if we can partner up on this. We are going to check out the property later today. Wish me luck!

[Paul Bowers]

@Michael Robinson let us know how it goes. Good luck

[Michael Robinson]

I know it's been a while but I figured I'd update anyone who was interested in what happened with the deal I was pursuing.. I wasn't able to close deal due to another investor grabbing the property before I could get things together. I believe it was a day or two after I viewed the property that there was an cash offer that the owner accepted. It was definitely disappointing to hear but I did learn a lot from the process. It took me a little longer than it probably should have to crunch the numbers on the property but I definitely wanted to be confident in the deal. However, I was able to FINALLY talk my family into working the deal with me but after I missed the opportunity I realized I would want to do financing alone or without family at least for now. It's just more stress than I can handle. The property was on MLS which I review everyday and I was able to see how important it is to be able to move quickly when there is a opportunity out there. I did meet a Private Money Lender through this post also who gave me a few pointers so that was nothing but positive! All in all it was great experience. I can't wait to find the next property and use what I learned from this deal. A big thank you to everyone that chimed in on this post also! You guys make this community what it is.