Flippin, Is the party now over? - Posted by Keith - Illinois

Posted by Ben (NJ) on June 08, 2001 at 12:47:15:

I just had this conversation with my wife. We got a doctor’s bill yesterday for $300.00 based on the doctor’s fifteen minute examination of me. My wife predictably stated, “we are in the wrong business”. “Au Contraire, my dear,” I said, “the difference is when that doctor takes a lunch break she makes nothing, when she sleeps or goes on vacation she makes nothing. We, on the other hand, don’t work for money, money works for us!” (with due credit to Robert Kiyosaki)

Flippin, Is the party now over? - Posted by Keith - Illinois

Posted by Keith - Illinois on June 07, 2001 at 21:56:17:

Hello,

I’m a rehab investor in Chicago Illinois and a couple of good mortgage brokers are now saying that my flipping days are now over. They tell me that no lender will finance property that has changed title within several months. They further say that the only lenders who consider doing it are also demanding that the seller (rehabber) have all rehab costs receipts (Cancelled checks) contracts, etc to support the increase in price (from the time that it was first purchased to the time that the rehabber has finished and attempting to selling it), and they’re also telling me that these same lenders are rejecting deals that show a large profit margin?! Now that’s down right UN-AMERICAN !

My question is: Are there Direct Lenders that finance these properties without chain of title being an issue and the amount of profit that is being made assuming there is a legitimate appraisal, etc? Also, I have recently found a property that I can buy wholesale (real low) and then I want to immediately sell it to another rehab investor for a BIG marked-up price; How can I best do this assuming all the above is true?

Thanks!
Keith

Re: Flippin, Is the party now over? - Posted by Gary

Posted by Gary on June 11, 2001 at 01:01:04:

Attention Rehabbers: Email for info about our “after rehab” flip funding “with no seasoning of your ownership required”.

Another rehabbers point of view - Posted by Mike

Posted by Mike on June 08, 2001 at 13:51:08:

Keith,

I’m in Chicago and have been rehabbing for a few years now. I agree with most everything JPiper is saying. Yes, it has definitely become very difficult to “flip” houses that were purchased less than a year ago. I certainly don’t agree with it. Lenders are doing this to try to avoid getting into fraudulent deals and they figure anyone trying to resell a house within a year must be up to no good. Basically, they are treating it like cancer. They are removing the whole organ instead of just the infected area. I guess their thinking is that if we cut all rehabbers off, then we’ll miss out on some legitimate deals, but avoid a whole bunch of bad deals. Perhaps they are right. Personally, I think they should just do their due diligence and actually hire their own appraisors to inspect the property instead of trusting these devious mortgage brokers to get the appraisal done.

I’d also like to mention that in my experience the majority of these “flip” deals are getting the kabosh by the B-C-D market lenders. Basically, if your credit is not up to fanniemae guidelines then you’ve got a problem with that buyer getting financing.

I have found however, that if your deal is 100% legit and above board, your best off going FHA. Here in Chicago, FHA seems to be alive and well and frankly is the best deal for your end buyer. The down payment is only 3%, sometimes less and the interest rates are excellent for credit bruised borrowers. Sure you have to spend a little more money to rehab your home, but you can rest easy at night knowing that your buyer is getting a good property. The FHA appraisor will be glad to give your house a top dollar appraisal because it’s worth it. You may wait a little longer to find a qualified buyer, but you don’t have to mess around with seller carrybacks and fake downpayments. In my opinion, FHA is probably the only program that will stand the test of time.

At any rate, I don’t agree with the seasoning rules that are being enforced. It is a real issue, but over time I do think it will clean up the industry a bit. There will always be unscrupulous investors and mortgage brokers, but hopefully they will be minimized in time.

Good Luck.

Re: Flippin, Is the party now over? - Posted by JPiper

Posted by JPiper on June 07, 2001 at 22:39:46:

Keith:

Must be a full moon out there or something! First I read about “trusted general contractors”, next I read about “good mortgage brokers”…a “couple” of them no less!

Forgive the rant Keith, but mortgage brokers in general make me sick! The “end” of the “flipping” business has been in sight for a few years. We’ve been talking about this here on the newsgroup for a couple of years or so. While we were talking about it, you know what those “good mortgage brokers” were doing? ZIP, NADA, ZILCH! Think they were battling all these geniuses that lend other people’s money regarding their growing moves regarding “flipping”? Nope…they were sitting back, doing refis, and moving to the next guy who would do your “flip”. Well guess what…they’re out of lenders to move to now! The business has changed! I swear to God, some of the most overrated people on earth must be mortgage brokers.

So here’s the bottom line Keith. The business the way you been doing it is over. And if there are still lenders out there will to do a rehab deal here and there…it’s probably going the way of unseasoned refi.

One way to approach things now is to buy with a credit line…season for 12 months…and THEN sell or do a refi yourself, thus taking your deal off the line.

In your case, you can wholesale your deal if the investor/buyer/rehabber can pay cash, if you can get him a hard money loan, if you can get him a hard money loan and carry him for the balance until HE sells. Of course Keith, remember this…he’s going to have the same problem you’re experiencing.

And Keith, next time you make an offer on one of those REO’s, and the agent asks you why the offer is so low…tell them. You can’t sell the house after you fixed it up…and therefore you’re offering less to make up for the length of time you now have to hold…to accomodate the lenders desire for seasoning. Maybe if enough investors have the cajones to “convey” their thinking UNLIKE their mortgage broker comrades, perhaps the lenders will RETHINK a policy that has hobbled a legitimate rehab business.

JPiper

Not a rehabber, but… - Posted by Ben (NJ)

Posted by Ben (NJ) on June 08, 2001 at 07:05:11:

I have taken a couple of nice houses this year through tax foreclosure for literally pennies on the dollar. I am still working on loose ends, title insurance, eviction,etc. But, after that I was going to sell one property and mortgage the other one to pull out some cash. I would not have owned either one for more than six months. Am I going to run into the same problems?

Re: Flippin, Is the party now over? - Posted by Jim IL

Posted by Jim IL on June 07, 2001 at 23:39:39:

Jim,
Well said.
But, I sort of disagree.
I do not think that the “party is over”.
Wouldn’t the seasoning issue that people keep talking about when wholesaling be the same as when we do a simultaneous close for a sandwich L/O?
Heck, I’ve closed two already this month, with two more scheduled.
The lenders for my end buyers never said a word about the price difference between my sale and my buyers purchase from me.
And these are all getting purchased WELL BEFORE 12 months is up since I signed the original L/O agreement with my sellers.
I just think people need to look harder.
Thankfully, my local brokers are still getting these deals funded.

Also, not one of my buyers is doing a refi on these, they are all straight purchase mortgages.
I’ll only be “on title” for a few minutes, and there is a nice difference in the prices. (why else would I do them?)

We shall see, but so far, at least in my area, some mortgage brokers seem to be just blowing smoke over seasoning.
To date I’ve only had ONE lender make noise over this issue, and my attny just had my buyers buy directly from my seller, and the seller paid me a “Fee” to release my claim on the home.

I’d be interested to hear others take on this,
Jim IL

Re: Not a rehabber, but… - Posted by JPiper

Posted by JPiper on June 08, 2001 at 07:19:48:

Hi Ben:

Your deals could easily turn into the classic seasoning issues.

The lenders don’t like toa cash-out refi first of all at under 12 months seasoning. If they do, they’ll probably hit you with the rate, or perhaps lower the LTV, bump the rate, etc. I think you’re more likely to make a deal here with your small local bank that you have a relationship with than the mortgage companies. As I said in a lower post, I recently closed a refi where they wanted to see my HUD-1 to verify that I had owned the property for over 1 year. It was a condition of the loan.

Selling the property is the same type of issue except here your borrow may have the problem. You will be well served to locate a friendly lender yourself rather than to simply go with the lender that your buyer comes up with. It also depends on whether the lender formally checks for title seasoning. Some of them don’t, so in your case where your property is not in the MLS you may be able to get around the issue provided the lender you deal with does not pull a chain of title.

This is definitely something to address. I would also say that the better your borrower in terms of his qualifications the more apt a lender would be to make an “exception” to their internal seasoning guidelines.

JPiper

Re: Flippin, Is the party now over? - Posted by JPiper

Posted by JPiper on June 07, 2001 at 23:59:14:

Jim:

Seasoning is definitely not smoke…but nevertheless it’s gratifying to hear that you’re having no difficulty up to now.

Actually, in my opinion there is very little problem with the sandwich lease. Various ways to handle this, and certainly none better than paying off the performance mortgage to obtain a “release”.

The fact that you evidently have closed a couple of deals without needing to do this at all is interesting. What kind of lender was this? What type of loan was it? I think the lenders are still doing these types of loans by exception, but not as a rule. Depends on how bad they want the deal and the borrower.

On the other hand, a “workaround” becomes considerably more difficult for a rehab. Here you’re going to close the deal. Rehab. Then later sell the deal. The question will likely come up about how long you’ve owned it. Depending on the lender they could run a chain of title to verify time of ownership. I just recently closed a refi where the lender asked for my HUD-1 from when I bought the place, to verify that I had owned it over one year. Certainly verifying repairs is becoming the norm, wanting receipts, etc. It’s unlikely that you would be able to show your proceeds as a “release” for the original sale.

Sandwich leases are an easy deal though in terms of the seasoning issues.

JPiper

One more point… - Posted by CurtNY

Posted by CurtNY on June 08, 2001 at 08:57:52:

When a lender has an appraisal done, the appraiser also lists if the property has been sold within the last twelve months. So even if the lender doesn’t pull a chain of title they will still know whether or not the seller (rehabber) has owned the property for 12 months or more. I’m an underwriter for an internet based mortgage company. We see appraisals all over the country and every one has this listed on page two under the comparables section. We don’t necassarily need twelve months but if we see a substantial difference is what the seller bought it for and is selling if for we require proof that work was done. Just something to think about. Best of luck.

CurtNY

The bright side…? - Posted by Ben (NJ)

Posted by Ben (NJ) on June 08, 2001 at 08:13:13:

I’ve been debating whether to hold onto these properties for a year anyway because of favorable capital gains treatment. Looks like I may not even have a choice. On one house it has taken five months anyway just to get the former owner out, then I have to assess the interior of the property and see what needs fixing, so a few more months won’t kill me and will result in a tax benefit. I could always go the hard money route but who wants to pay 12%+ and points when interest rates are this low? Thanks, Jim.

Re: Flippin, Is the party now over? - Posted by Valerie

Posted by Valerie on June 08, 2001 at 07:52:46:

Now you’re scaring me. I am a brand new investor… In other words, I have no done deals but I am going to look at some properties this weekend. I have a few contacts for private lenders, BUT my idea was to flip a few so i could get a little cash under my belt so I could start re-habbing. Where do I stand?? I am determined to make this work… ideas anyone? PS - I am in the northeast suburbs of Philadelphia.

Valerie

Re: One more point… - Posted by Roger

Posted by Roger on June 08, 2001 at 13:44:15:

Curt,

Just for fun, what’s your opinion as an underwriter:

Purchase price = $170k
Fix-up = $10k
Sale price (4mo title seasoning) = $220k (easily supported by comps)

  1. Would my buyer have a problem getting a loan with your company?

  2. What if, in the stack of rehab receipts, there was a consulting fee invoice from my rehab corporation (current title holder) to me as an individual for $40k. So, essentially, purchase price + rehab costs = sale price…your underwriting criteria has been met. What I am suggesting is completely legal, ethical and above board. The only thing I can see is that you may
    consider the consulting fee too high and deny on that basis. What do you think?

Roger

In my case… - Posted by Ben (NJ)

Posted by Ben (NJ) on June 08, 2001 at 12:22:31:

I took the property through foreclosure. The only place this would show up is through a county level title search which shows I received Final Judgment in foreclosure AS my deed. Would your company run a full title search if doing a cash-out refi, or just rely on appraised value?

Re: One more point… - Posted by JPiper

Posted by JPiper on June 08, 2001 at 09:04:08:

Just thought I would point out that in some parts of the country (mine for example) it’s not possible to know whether a property has been sold unless:

  1. It was sold in the MLS

  2. A chain of title is pulled.

Clearly some properties are bought outside the MLS system, and therefore here locally the appraiser would not have a way to know whether there has been a sale in the prior 12 months. Again, the only way to know this would be to pull a chain of title. Some lenders are requiring this by the way.

JPiper

Re: Flippin, Is the party now over? - Posted by JPiper

Posted by JPiper on June 08, 2001 at 08:41:11:

No need to be “scared”…just a need to acknowledge a few realities and then make sure your direction is consistent with that direction.

First, the term “flipping” is a poor term because it doesn’t describe what you’re proposing to do very well. Further, “flipping” has been the subject of many newspaper articles in a negative way, and therefore has become nearly synonymous with fraud.

Wholesaling is still OK as long as your buyer/investor either has cash, or you or he has access to a hard money lender to get the cash.

If you make the move to rehabbing you’ll have to have a solution to the seasoning issue. A credit line is one solution, enabling you to hold the property long enough to season your deal.

The message is clear though…the lenders don’t want you to buy today and sell tomorrow (or a few months from now) to a retail buyer. And therefore you either have to figure out ways to NOT deal with institutional lenders, find lenders who will look past this issue, figure out ways to hold the properties so that it is not an issue, or do different types of deals.

The banks are making it clear that this is an area that they are not all that interested to do.

JPiper

Re: In my case… - Posted by CurtNY

Posted by CurtNY on June 08, 2001 at 12:32:13:

Ben,
We always require title insurance on any mortgage. In order to get the insurance, yes the title would be researched. Did you own the note that was in default and foreclosed or did you by the property from a bank as a foreclosure (or at auction)? Our company would do a cash out refi, depending on how you took ownership (bought it, or took it back via foreclosure), if you bought it outright from the bank and its been less than twelve months, we would use the purchase price; but if you were selling it and the buyer applied for a mortgage, we would go off an appraisal as long as we could provide evidence that the property was bought as a foreclosure and the property had work done to bring it to its current value. Hope this helps.

CurtNY

Re: Flippin, Is the party now over? - Posted by Del’Win

Posted by Del’Win on June 08, 2001 at 11:22:40:

Would putting a property into a LLC take care of the seasoning issue that the brokers are complaining about?

Thanks,
Del’Win

Would this be the case in… - Posted by Mark W.

Posted by Mark W. on June 08, 2001 at 11:09:11:

my area as well? (Southeast-TN) I was planning on Wholesaling/Flipping to build capital and was also planning on purchasing Steve Cooks course.

Should I consider starting with L/O

Do I need to check further in my area to find out just how Wholesaling/Flipping is perceived here or would the case in Illinois be the “norm” for the rest of the country as well?

Thanks for your help!
Mark W.

Re: Flippin, Is the party now over? - Posted by Valerie

Posted by Valerie on June 08, 2001 at 08:50:38:

OK - I guess I need to make some contacts with private lenders then. Also, how about pre-paying the first 6 months of the loan to season it? Does that work?