Talking to a lender

[John Williams]

I recently talked to a lender about getting a mortgage for a foreclosure. I told him that I wanted to purchase the property, do some moderate rehabbing, and then resell the property. He seemed confused that I wanted to buy only to resell a short time later (flip). Is this because conventional/investment property loans aren’t normally used for flips? I realize that I might have to hold it for up to a year with this type of financing. Is he just not used to dealing with flips? I said I thought the property was a decent deal (asking 96k when comparable houses sell for 130-140k). However, he said something along the lines of “the seller wants to make a profit too, why would it be underpriced?” Because this is my first deal, his confusion has caused me to be a little hesitant. Am I doing something wrong here? I thought bank owned foreclosures were often sold at a discount. Am I misunderstanding something? Thanks everyone! John

[Chris Mason]

Originally posted by @John Williams:

I recently talked to a lender about getting a mortgage for a foreclosure. I told him that I wanted to purchase the property, do some moderate rehabbing, and then resell the property.

He seemed confused that I wanted to buy only to resell a short time later (flip). Is this because conventional/investment property loans aren’t normally used for flips? I realize that I might have to hold it for up to a year with this type of financing. Is he just not used to dealing with flips?

I said I thought the property was a decent deal (asking 96k when comparable houses sell for 130-140k). However, he said something along the lines of “the seller wants to make a profit too, why would it be underpriced?”

Because this is my first deal, his confusion has caused me to be a little hesitant. Am I doing something wrong here? I thought bank owned foreclosures were often sold at a discount. Am I misunderstanding something?

Thanks everyone!

John

 "They" have been saying "want a great deal, buy a foreclosure!" for 30 years now... banks aren't (that) dumb, and REOs aren't automatically a good deal any more. They may or may not be. "Fixers" in general aren't automatically priced well either due to the HGTV Effect -- everyone thinks they are going to be a flipper, including owner occupants, and supply/demand sets prices, not the home itself. Prices go up as demand goes up, and I'd say something like 1 in 3 of the vanilla retail owner occupants I speak with say something about how they "want to buy a fixer to live in." Demand for turnkey homes already in perfect shape to live in is actually down a tad, relative to people that want to live out the HGTV fantasy wherein throwing in $20k in upgrades actually adds $20k in value. 

Often, if there is a significant discount, it's because the seller or bank knows that the property is too beat up to get institutional financing, meaning that discount will be offset by you having to pay 4 points upfront for a hard money loan at 12%. 

Your lender is confused because he's one of the overwhelming majority that goes an entire career without learning anything but how to finance single family homes for married couples intending to live there, which is the overwhelming majority of mortgages written. REI lending is a niche.