FHA 203K - Indianapolis - Does the house have to be distressed?

Question

I want to do a live and flip over the next 1-2 years. I have 3 roommates that are willing to pay me $475/mo in a home that suits their expectations. I've found a property that is $165K in my favorite, most desired neighborhood but it's very livable right now. The neighborhood supports a 3/2 of this size, if updated at $225K-$245K, but this house simply doesn't have the updates. Thus, the ability to make $15K-30K after living for free.

Here's my play. I've been pre approved for $200K and want to execute a 203K loan -- I want as little out of pocket on my end as possible. I estimate my total expenses to be around $1,450 (mortgage, taxes, insurance, repairs/maintenance, utilities, wifi/cable). Essentially it will breakeven with around net $0 CF.

Here's the question: Is this the right property to execute a 203K? My mortgage expert thinks so, but I feel like the BP crowd talks about this being best for distressed properties with TONS of upside. This property has great upside -- the neighborhood is VERY desirable but I'm not going to make $50K+ (unless the market fires up in a huge way -- let's hope).

Please let me know your thoughts. I'm going to put in an offer unless I discover any red flags in the next day or so.

Clay Manship · Answer

@Matt SpeerProps to you for doing the digging and getting the information you need to make an informed decision. Most people will just do things according to the status quo and never ask why. Even though you had questions about strategy, you surrounded yourself with people that had quality answers and provided good insight. Most people don't do this either. At the end of the day it is YOU who is making decisions and making it happen. Well done.

Clay Manship · Answer

@Matt SpeerSeems like I am chiming in on a lot of your FHA loan related questions...haha. Here is what I would do:Everything depends on how long you plan on being in the house. If it is one year, go ahead and do the FHA 203k loan now. You MUST live in the property for one year under any FHA loan. If you are going to live there several years, go ahead and just do a typical FHA loan for now, and avoid borrowing the additional ~$50k in rehab money for the time being.Then, once you have said "one year from now, I plan to sell and move on" go ahead and refinance into a 203k loan product. Last I checked, for 203k products, you will still be able to achieve 97% LTV, including the post-appraised value including your rehab. Just make sure it is your only owner-occupied residence. At that time, take the ~$50k FHA will give you in the refinance, make the necessary value-adding improvements, pay the additional debt service for 12 months, and then sell for the appreciated price and be done with it.That way you are saving on the up-front amount borrowed, but still capitalize on the FHA 203k and the increased "flip" value by forcing appreciation via upgrades. Hope that makes sense. What neighborhood is this in? Happy to give some more pointers. Shoot me a PM if you like...

Matt Speer · Answer

@Clay ManshipThanks a ton for the insight. I actually talked with my agent this morning and we're going to go ahead and move with this strategy. I owe you a cup of coffee or lunch at the least! Haha Your input is much appreciated.

Sean Elliott · Answer

Matt Compare this home to others in the market to see if what you say is true about forcing the equity. Dont fix what's not broken. Is the property priced below the current market trend of actual sales. The goal is to make money going into the deal.

Patrick B. · Answer

@Matt SpeerThat sounds pretty encouraging. If it's the house I think it is then I think you're right in terms of the area supporting higher comps. Very nice area. Popular neighborhood. Good schools. Affordable homes, at least relative to Meridian Kessler, that attract many first time buyers / young couples. I'd ask your realtor to pull some comps on recent sales for you to compare and contrast.

Matt Speer · Answer

@Patrick B.Sorry, forgot to tag you.

Matt Speer · Answer

The home is priced very fairly -- I'd be getting a pretty good deal. I can force equity by updating the kitchen, bathroom upstairs, by completely finishing the basement, and making the backyard more of an entertainment area.

Patrick B. · Answer

@Matt SpeerThis house seems more like a finished product. If you buy it, what will you do to create equity? New kitchen? Add a bath? Or do comps suggest the home is priced lower than it should be? If it were me, I'd be looking for a home with more problems. The more problems I can fix and the more updates I can make, the more equity I might be able to create.