In our current real estate market, flips have become a daily part of our business in addition to bank owned properties and short sales. It is vital for your success to partner with a lender who understands flips and can successfully navigate the process.
WHAT IS CONSIDERED A ‘FLIP’?
The primary lender definition of a ‘flip’ is when the current seller has been on title for less than 90 days. A secondary definition is when there have been ‘multiple’ title transfers of a property within the last 12 months.
WHO CARES & WHY?
Your buyer’s lender cares. In the past, fraudulent flip transactions were used amongst family members or business partners to artificially increase the value of a property and ultimately sell the home to an end user at an over-inflated price. Parties to these scams were sellers, buyers, realtors, loan officers, appraisers and title companies. To avoid this fraudulent behavior in the future, investors and regulators have put in guidelines and safeguards to verify that any ‘flip’ transaction is bona fide.
DEED TRANSFERS
Before your buyer makes an offer on a property, it is vital to check the title history of the property. When did the seller take title? Have there been multiple deed transfers in the last 12 months? Has the price increased dramatically on the title transfers? If the county records do not give you updated information, you will want to ask the listing agent. Prior to the offer on a ‘flip’, call your lender and discuss the property. Your buyer’s lender will need to follow certain ‘flip’ guidelines.
FLIP INVESTORS
If your buyer is purchasing a ‘flip’, your lender will have only certain investors who will accept the loan and each have their own underwriting criteria for flip transactions. This criterion also differs whether the loan is FHA, Conventional or VA. The guidelines are too in-depth to cover in this newsletter. It is vital that you work with a lender who understands flips, knows which investors will loan on them and how to properly document the file for an approval. Interview the lender carefully to determine their understanding of the process and never use an unqualified or inexperienced lender on a flip!
APPRAISAL REQUIREMENTS
The appraisal requirements also differ between investors and are determined on the value increase of the property from the time of the seller’s purchase compared to your buyer’s purchase price, and also on what upgrades or renovations have been done. If the seller has done renovations, it may be required or helpful for the seller to provide documentation to the buyer’s lender on the work done. Oftentimes, a desk review or second appraisal will be required on a flip transaction. An educated and experienced lender will understand how to document your buyer’s file and manage the appraisal process so that required information is included in the appraisal.
Richard M. Jefferson, Sr. Mortgage Consultant
NMLS #25381
16150 N. Arrowhead Fountain Ctr., Suite 260 Peoria, AZ 85382
Phone: 480.444.7143 Direct Fax: 480.444.7193
rich.jefferson@onqfinancial.com / www.richjefferson.com
We do a lot of short sales and flips. One of the biggest hurdles we come across is trying to get investors who aren’t going to try and take advantage of us. I have to read the documents very carefully before I sign anything. It seems they always try to sneak something in that could really hurt us.
Aside from that, our flips have been working very well for us.
I started doing flips a year or so ago. We were not vwery successful at it becauese the lenders didn’t understand them I have since started listing short sales and the consistency is there but maybe not the quick buck that we used to get. The biggest problem is nto committing fraud with the bank by not disclosing what your intent is.
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Checking the deed transfers is critical. This one thing can tell you so much about the history of a home.
Flips are okay as long as you have done it in the right procedure along with the right people. The number one caution about this is never use an inexperienced lender.
I agree with the previous posts. I did a flip for the first time last year and the toughest part was finding a lender who understood the nuances of what we were trying to do (it was a pretty creative deal!). It pays to shop around and talk to other investors who perform flips on a regular basis to see who they use. My local Real Estate Investment Club has been a GREAT resource for that kind of information.
So much in house-flipping depends on the real-estate market, which we all know is cyclical. During a boom, flippers have the upper hand and can almost name their price in some areas. But during a slow period, many of these fixed-up homes can sit on the market for months. nice post by the way! I came across your site while trying to find a source for real estate-related topics. Very interesting post indeed – I will link to this on my blog.
Charles
Does FHA require 90 day ownership of the property or has that changed? Does anyone know by chance?
Absolutely right. Checking the deed history pattern is one of the sure ways to investigate if the flips were genuine or not.
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Right now the likelihood of finding a home to flip is challenging at best. However, if you do it, it is so true that you have a lender that understands the process of doing the lending. The last thing you want to do is get to the closing table only to find out that your lender really did not know what he was doing and you are stuck holding the bag. “If it is too good to be true,” most likely it is.
We are doing some short sales and flips currently. We must make sure to get the right investors and properties to make sure that the flip is successful. We put a lot of time and effort into making sure it is done right.
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I’ve been flipping homes for a little while now and in my area, dealing with a knowledgeable title company is just as important as dealing with a good lender.
Access to cash and lines of credit make fixing & flipping a lot easier. To improve neighbourhoods it’s important to allow rehabbers to fix & sell fast without too many restrictions. As mentioned, its good to keep records of renovations and also have an appraisal done post-rehab.
Good article. Flipping basics in this market are as critical as ever:
o Location, location, location – you need to sell it quick once renovated and location is critical.
o Condition of the home – exactly how much work and what kind of work? It needs to be the type of work that can be profitable.
o Motivated seller – will the seller negotiate on price?
These condition must be met.
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Great amount of detail in this. This real estate activity is not seen in Spain. Maybe it should. We have thousands of homes standing empty with few buyers. A little more imagination in the selling system from banks, developers and local government would be welcome.