All Forum Posts by: Jody Michelson

Hi Laura,

In addition to the good suggestions above, almost the single best investment you can make is to purchase J. Scott's companion books (published by BP), 'The Book on Flipping Houses' and 'The Book on Estimating Rehab Costs.'

You'll learn SO much from these books about creating a scope of work (which is a first step in determining how much rehab will be), valuing property (in case you're not familiar with basic comp analysis), determining how much you should pay for a property, and tons more.

Good luck!

Hi George,

You may want to check out Chapter 14 from J. Scott's The Book On Flipping Houses. It's provides a nice conceptual and practical framework for determining the scheduling components of flips, including an optimal ordering of the work; factoring in and planning for dependencies (when the HVAC is getting upgraded, the electrical has to be on and often the gas, etc., so planning around those; with enough dependencies, it could be easy to overlook a few of them at first, although the example above may not be the best); an anticipated timeframe for each of various tasks (he divides the property into 25 very handy and well-organized components, and covers them one at a time as well as how to view it in the larger scope of a rehab), and more.

With your level of experience, you should be able to sail through your first rehab quickly and easily.

Good luck!

Hello @Denisha McDonald,

Thanks for the reply. When I initially posted the question, I was asking about the challenge for buyers of flipped properties to get financing for properties that were acquired, rehabbed and listed for sale within the first 6 months of ownership and where the acquisition-to-selling price was considerably increased. This was asked from the vantage point of a few properties I wanted to rehab and sell fairly quickly.

As J. Scott detailed so clearly, each loan type - FHA; VA; Conventional; Portfolio - has its own anti-flipping (or not) policies. Some of these restrictions arise when the property being sold is priced at more than 120% of original purchase price. However, as he also pointed out, with some loan types, even with a large markup between purchase and selling price, if the property valuation can be justified via appraisals and/or receipts detailing work done during rehab, lenders can be willing to loan on the property.

While this may not be correct, it seems your question was asking whether if the big issue was having banks unwilling to lend within a certain (short) timeframe from purchase to rehab to listing for a property being sold at a considerably higher price, couldn't a rehabber/purchaser offer a lease/option to a buyer, thereby adding enough extra holding time as to get beyond the lender's anti-flipping restictions? (My rewording, and apologies in advance for any misinterpretation.)

While in theory they could, here are a few challenges I see to that (and I preface the following with the suggestion that others have way more knowledge and experience than I do, so the 'grain of salt' rule applies :)):

Once a property is set to be listed, the big expenses for a rehabber are the holding costs (property taxes, insurance, interest on a hard money loan, etc.). If, as you suggested, the rehabber agreed to a lease/option to get past the timeframe often called for by a bank when a property is sold within a short timespan for considerably more than purchased for, that would mean that, while the rehabber would get rent for a few months (the lease component) along with an option fee, they'd also be potentially turning away other purchasers and paying holding costs in the meantime.

Assuming the rehabber agreed to the lease/option, they and the buyer have no assurance that when the buyer applies for a loan on that property, they'll be able to get one. Even if they're prequalified for the loan amount, that doesn't guarantee that their lender will loan on that particular property. And while it's true that if the buyer couldn't get a loan and was unable to exercise the option the rehabber would keep the option fee, that also would result in potential lost opportunities for the rehabber/seller (other potential buyers, possibly even willing to pay more), all while they continue to pay holding costs.

In addition - a lesser point - after a few months of the lease/option buyer living in the property, all of the 'new' upgrades would have some usage on them. If the buyer either decided not to exercise their option or couldn't get financing for that property (or for themselves), the rehabber/seller would be selling slightly used upgrades. (The seller could not longer highlight in the listing, 'NEW wood floors, NEW granite countertops, etc.'; instead, they could only advertise, 'almost NEW wood floors, almost NEW granite countertops, etc). It may not seem a big deal, yet that would impact the selling price.

Unless the option fee was high enough, that wouldn't be worth it.

So, in theory - and it's great that you're already considering creative ways to work with these issues - while a lease/option would be possible on a flip as a way to get around the anti-flipping issue, it's likely not that ideal.

All of that said, based on J. Scott's super helpful and concise posts earlier in this thread, depending on the loan type, he and other rehabbers have used the appraisal process (in many cases required by these lenders) along with receipts for work performed to justify the much higher acquisition-to-selling-price-within-a-short-timeframe issue. So, there does seem to be a way to proactively work with this.

That doesn't mean that lease/options aren't a good strategy in various situations. It's just that as a way around the anti-flipping clauses, there may be better approaches.

A bit of a lengthy and loquacious reply, so thanks for reading.

@J Scott It sounds as if not only should I be searching for properties, I should also be searching for high-end mortgage brokers to recommend that my would-be buyers use. That was totally off of my radar screen until you helped me become aware of it, and I'm certain it will preemptively prevent many (maybe not all :)) unforced beginner mistakes on that front.

Also, thanks for suggesting your post 10 Rules to Improve Your Sales Closing Success. That's about to get printed and hung on the wall, bookmarked on the laptop, etc., and referred to time and again.

Thanks so much again for your peerless advice!

Excellent advice @John Moore

@John Moore

@John Moore

Thank you @Matt Devincenzo

@J Scott That's exactly the kind of insightful and definitive guidance I was hoping to get. I've been inspired by your work on BP (including your books) and have learned more from you about flipping than anyone.

So, thanks for the superb and very helpful post!

Thanks @Scott Culver

Thanks @John Rooster - that's good to know. Have you found any variance between lenders in general, and between big banks on the one hand and portfolio lenders on the other in particular?

And after 3 or 4 months, do lenders commonly ask for a list of upgrades to the property as a way to justify the higher price?

Thanks for the suggestion, @Trevor K.

@Trevor K.

@Trevor K.@Trevor K.

@Trevor K.