"You can only flip a property for 20% profit."

[Herm M.]

What does this apply to? Obviously flipping properties.

But what does it mean?

So if I buy a property for 500k and put no work into it... I can only sell it for 600k? According to which lender's guidelines? Which lenders don't have this guideline? Is the guideline irrelevant after 90 days, regardless of lender?

What if I buy a property for 500k, then spend 100k on it? Does that mean I can now sell it for 720k?

I guess my question is... are most lenders lending strictly on appraisal right now? Or are they limiting an investor's profits?

[Chris Winterhalter]

It greatly depends....however lenders want to see justification for an increased price in a short period of time. With all of the mortgage fraud and cash out refis during the boom these guidelines have become common place. FHA requires two appraisals for flips under 6 months (or at least they did). If a rehab is completed and the property appraises then the profit is irrelevant. Regarding flips (under 6 months) that don't include rehab I believe FHA only has the 20% profit rule. I might be off base on this but a good mortgage lender would know all the details.

Mortgage lenders????

[Sonja Tani]

Hi,
The only lender that I have encountered that has this condition is Fannie Mae and it is only for up to 90 days. There may be clauses in contracts with other lenders so be sure to check but it is part of the Fannie Mae addendum that must accompany any bid to them.

[J Scott]

See Sonja's reply above...

FNMA will restrict you from reselling or encumbering an REO purchase for 90 days for more than 120% above the purchase price. After 90 days, you can do anything you want.

[Bill Gulley]

The purchase price plus cost or repairs. Your $720k is correct under fannie... This has been discussed before on BP, might search for the examples. :)

[J Scott]

Originally posted by Bill Gulley:
The purchase price plus cost or repairs. Your $720k is correct under fannie... This has been discussed before on BP, might search for the examples. :)

Bill - We've discussed this...it doesn't include the cost of repairs! :)

The maximum resale value is "hard-coded" into the addendum (at the time you sign the Purchase & Sale Agreement), and is only based on the sales price, not any repair costs.

Here is a real example of the verbiage in the addendum (from one of my purchases):

http://www.biggerpockets.com/files/user/JasonScott/file/30-fnma-addendum

See #14 in the middle of the page...the purchase price of this property was $31,500.

[Bill Gulley]

Sorry, I'm on a netbook and can't download pdf files.

I do remember your issue pretty well, it was the bank using the form and that they were drafting it, I said to be lazy as well as conservativelt compliant.

Fannie will allow costs and it was specifically addressed in its setting the guideline. I gave an example. Problem is the lenders don't want to go through the work of verifying costs for repairs. If it were something simple, like a new HVAC system for 8k on a 35k property, I don't see where they would have a problem.

Not saying you were not held to that standard or have docs to that effect, just saying that's not what fannie had in it's underwriting ruling. If you think about it, it is trying to limit wild profits on short flips, keeping artificially over priced properties from being picked up in the guaranteed market. They were never saying you couldn't buy a 35k property and make 30k in improvements unless you took a loss or held past 90 days. Not the intent.

To those doing such flips, I'd suggest you get it from your bank as to what they will do, if they will underwrite with all the supporting docs. If they will, tell your buyer about the possible financing.

There are ways around it, lease and close later on. :)

I'm being dragged out for some shopping mission by the gf. I hope to survive, I hate shopping!

[Chris Martin]

Here is a Related discussion on BP. Still seems to be only a FNMA restriction on an investor's FNMA acquisitions as Sonja and J Scott have already posted...

[Herm M.]

J Scott mentioned that this is a FNMA guideline for REO's. So it doesn't apply for short sales? I know there's deed restrictions on short sales sometimes, but aside from that...

We bought a property as a short sale for 656k on 9/11/2012. We're in contract to sell it for 938k. I'm just checking to see if I'll have any problems with the buyer's lender saying we are making too much profit, too quickly. The property won't have any issues appraising, and we're almost at 90 days anyway.

[Andy Bankston]

J Scott is 100% correct. If you purchase a property from FNMA as an investor you will be required to sign the addendum linked in his post above. It states that you will be restricted from re-selling the property within 3 months for an amount greater than X. And X is calculated and filled into the blank as 120% of the purchase price. I've dealt with this issue personally twice- once on a flip I've completed and once on a flip I'm about to have listed for sale. I'm sure J Scott has dealt with this issue even more in his numerous projects and can verify that at no point does the dollar amount of rehab have any bearing on what you can re-sell the property for within that first 90 days.

[Andy Bankston]

H Mann, I have not purchased a short sale yet but I'm positive that I've also read posts by J Scott stating he was encountering similar deed restrictions (some up to 4 months?) on some short sales.

[J Scott]

Originally posted by H Mann:

We bought a property as a short sale for 656k on 9/11/2012. We're in contract to sell it for 938k. I'm just checking to see if I'll have any problems with the buyer's lender saying we are making too much profit, too quickly. The property won't have any issues appraising, and we're almost at 90 days anyway.

Did you do any renovations on the property prior to resale?

If not, I've never seen a lender/underwriter allow a nearly 50% price increase in such a short time. You say it won't have any issues appraising, but if you didn't do any repairs, the best comp for your property will be YOUR property, and it's value will be considered to be what you bought it for.

[Herm M.]

^ We improved it quite a bit. Spent 75k on it.

[J Scott]

Originally posted by H Mann:
^ We improved it quite a bit. Spent 75k on it.

It will be up to the appraiser and underwriter to determine if $75K in renovations justifies $280K in value increase. In area that wouldnt fly, but who knows. Good luck!

[Herm M.]

Regarding this property, we're expecting loan docs this week.

So far, no issues.

BUT... one thing I have learned is this:

The loan officer said that the 90 day rule doesn't apply to funding date, it applies to the date the contract is signed.

So if I bought a house on January 1st, it's not that the buyer's lender won't fund until April 1st (91st day), it's that we can't enter contract until April 1st... which means it could take 110-120 days to close.

So I have another property that was bought for 275k on October 31st. It needed a small amount of work (13k). We listed it and got an FHA offer at 380k and a conventional offer at 380k. Obviously, we went with the conventional...

BUT... now the buyer backed out because, according to their loan agents, they won't be able to obtain a loan because of the profit margin within 90 days. The property will appraise at the contract price.

HOW CAN I GET AROUND THIS BESIDES WAITING UNTIL THE 91ST DAY TO ENTER CONTRACT?!?

[J Scott]

Originally posted by H Mann:

The loan officer said that the 90 day rule doesn't apply to funding date, it applies to the date the contract is signed.

So if I bought a house on January 1st, it's not that the buyer's lender won't fund until April 1st (91st day), it's that we can't enter contract until April 1st... which means it could take 110-120 days to close.

When discussing 90-day restrictions, there are three very separate issues that need to be considered:

1. When you purchase a property, the seller (FNMA in this case) may require you to hold the property for 90 days before you are legally allowed to resell it.

2. When you sell a property, if the buyer is getting an FHA loan, the buyer's lender may require you to have owned the property for 90 days before selling it or even putting it under contract to sell.

3. When you sell a property, if the buyer is getting a Conventional loan, the buyer's lender may require you to have done a relatively large amount of renovation in order to justify the new resale price.

Just to be clear, you are currently talking about #2.

This has been discussed at length previously, but to recap, this 90-day restriction was common with FHA lenders prior to 2010. In 2010, FHA waived this restriction and said (basically): "We will allow investors to resell properties in less than 90 days, assuming they can validate the resale value using a second appraisal."

Now, even though FHA said this was permissible, the individual banks that were doing the lending didn't always agree that they wanted to follow the new guidelines, and many of them still follow the old FHA guidelines of no sales (or contracts) prior to 90 days -- even though they don't have to.

You happened to run into a lender who refuses to follow the new FHA guidelines and is making you wait 90 days to get a contract. As I have suggested many times on BP, you should find a lender who will allow you to follow the new FHA guidelines and let you sell within the first 90 days, and then encourage your buyers to use this lender.

I sell lots of properties to FHA buyers within the first 90 days of owning them, because I have a lender/underwriter who is willing to do this. When I let my buyers choose their own lender, they sometimes choose a lender who won't do it, and I either won't accept the contract or I'll make them switch to my lender.

If you want to sell within 90 days, find a lender who will do it (many will these days) and get your buyer to switch.

So I have another property that was bought for 275k on October 31st. It needed a small amount of work (13k). We listed it and got an FHA offer at 380k and a conventional offer at 380k. Obviously, we went with the conventional...

BUT... now the buyer backed out because, according to their loan agents, they won't be able to obtain a loan because of the profit margin within 90 days. The property will appraise at the contract price.

HOW CAN I GET AROUND THIS BESIDES WAITING UNTIL THE 91ST DAY TO ENTER CONTRACT?!?

This situation is #3 above.

Remember above where I said:

"It will be up to the appraiser and underwriter to determine if $75K in renovations justifies $280K in value increase. In my area that wouldnt fly, but who knows. Good luck!"

That's what I was talking about, and it sounds like the underwriter wasn't willing to allow that amount of price increase for the amount of work you did. For conventional loans, I believe there is a formula the underwriter will use, though I don't know the details.

My recommendation in this case, if you don't want to wait the 90 days, is to do what I suggested above -- find an FHA lender who will do the deal in the first 90 days and then go with an FHA buyer.

I don't think you have any other alternatives with the conventional buyer, other than waiting the 90 days (or asking the underwriter what sales price they will accept earlier).

[Herm M.]

J Scott, first of all... thanks for the detailed response.

I am very familiar with the resale restrictions from some short sale lenders. So far, I've never had a 90 day restriction from the short sale lender/investor, only 30 days.

Now regarding your long description of FHA guidelines... I wasn't referring to FHA. This buyer is conventional. The problem here isn't necessarily the 90 days... it's the profit margin within 90 days.

I'm aware that FHA used to have a "we won't fund on a property that was purchased less than 90 days ago" policy 2 years ago. I'm also aware that it was scrapped. But do you mean to tell me that FHA will fund on a property within 90 days regardless on profit margin?

Lastly, your comment about "it's up to the lender to decide if 75k justifies 280k in price increase..." That loan is supposed to doc out today or tomorrow. So far, there's no issues on that one.

The new issue is for a separate property. Purchased for 275k on 10/31/2012. Only 13k of work... and now we had a couple buyers at 380k.