One of the most common real estate investor flip mistakes investors and agents make is easily avoidable if you know about it!

Real Estate Agent with Chartwell Realty
It's what I call "The MLS listing problem"

This problem occurs when the investor client desires to flip an investment house. Many investors use short term rehab lenders, hard money lenders, etc for their investment purchases. Investors know when they have financed their real estate flip using one of the many short-term financing resources, they only have a certain time frame to pay back their lender. Most hard money loans are around 6 months long or so. If the house doesn’t sell, the investor client will have to refinance the property (the lender needs to get paid back prior to the end of the loan term or the client will be in default).

When a prospective seller comes to you and wants to sell their house, you will usually put their home on the MLS right? We all know the local MLS is a powerful tool to use to sell real estate. I highly recommend the MLS but when dealing with real estate investors who are flipping, a little caution and understanding is necessary too. This is what your investor client will usually not know upfront, and how you as the smart and educated agent can help easily avoid a potentially very big mistake.

Most real estate investors will automatically choose to list their flip house at a lower price than the active competition in an effort to sell it quicker. This isn’t a bad idea unless they can’t sell the property! For instance, if most of the houses are selling around $125,000, many investors would look to list the property between $115,000- $120,000. Ok so what's the big deal you ask?

When your investor client gets a hard money or bank loan on their flip house, the lender will almost always do a subject-to appraisal. A subject-to appraisal means the lender will figure the after repaired value of the property so the lender knows how much money it can lend your investor client on the flip house and still be comfortable. Let’s take the example above and say the lender has lent your investor client 70% of the after repair value (ARV) of $125,000. Your investor client’s loan would be $87,500 ($125,000 X 70% = $87,500). Some lenders require a down payment and others don't, but all will have a specific maximum LTV.

Your investor client has done everything right but their flip house hasn’t sold. You as their listing agent have put the property on the MLS, put your sign and nice flyers out, marketed online, and used every strategy in your toolbox to help in the sale of the property. Again, regardless you and your investor client’s efforts, the flip house doesn’t sell. Worse, it’s coming up on your investor client’s 6 month term on their hard money loan and they’re probably going to have refinance now in order to pay back the lender and not go into default.

Your investor client wanted you to list their flip house at $119,900 in an effort to sell it quicker. Of course you did what your client wanted without much thought. Since it didn’t sell right away, your investor client asked you to lower the asking price a few weeks later to $109,900, thinking the new price would draw immediate interest. Showings picked up but still no offers. Your investor client wanted to try one more price reduction to $105,000 just a couple of weeks ago but now you have to cancel the listing so your investor client can refinance.

Your investor client just met with a typical conventional lender to refinance the property and this lender now throws 2 major wrenches at your investor client (which will create problems for you too):

1. The property has to be off the MLS for at least 30 days (if not a lot longer).

2. The value of the property would be based at maximum (or could be less) of the last MLS listed price, not the $125,000 appraised value your investor client initially had.

The rationale from the refinance lender’s standpoint is if the property didn’t sell for $105,000 on the MLS, it must not be worth any more, and quite possibly could be worth less. Whether or not this is correct, it’s the fact of the matter in how the refinance lender will operate and justify the value it is giving your investor client on the refinance. Having the property off the MLS for at least 30 days may or may not be a requirement depending on the lender your investor client is using for the refinance. I have found this to be more of a requirement than not though.

The value problem is the real problem you and your investor client will face if you are unprepared and uneducated of how the lending world operates. This means in today’s lending environment where an investor can expect to get 75% loan to value (LTV) of the appraised value on their investment property (none owner occupied property), your investor client would get no more than $78,750 ($105,000 last MLS list price X 75% max LTV = $78,750) from their refinance lender.

Wait a minute, doesn’t your investor client owe the current short term lender $87,500 from their initial rehab loan? This means in order to complete their refinance with the new lender, your investor client is going to have to bring nearly $9,000 to the closing, and this doesn’t even factor in any closing costs or other expenses. This is bad – what if your investor client doesn’t have the money to refinance?

This is also a problem for you, the agent, because you aren’t making any money since the investor client is not selling the house. And since the investor client and their money is tied up, he or she will not be buying any more property anytime soon! So you the investor’s agent aren’t making any money now, nor will you have any money in the near future, but guess who is calling you every day complaining? That’s right, your investor client is. Not only are you not making any money, but you have to deal with your investor client headaches.

The MLS listing problem is avoidable for educated and experienced investor agents who understand how real estate investment financing works. First, don’t discount your investor client’s flip house if you know they have a short term loan. Keep the listing price the full appraised value so if your investor client has to refinance, the last listed price is the original appraised value. In using the example above, had the MLS listed price been the original appraised value of $125,000, the refinance lender could have provided nearly $93,750 to your investor client for the refinance of the property ($125,000 last MLS list price X 75% max LTV = $93,750) instead of the $78,750 your investor client has from significantly discounting the property on the MLS.

But wait a minute, shouldn't I do what my investor client wants me to do? Of course you should but you need to make certain your investor client knows about the MLS listing problem because 9 out of 10 investors don't know this!

Second, know the bottom threshold where your investor client can’t afford to discount the property any further. Encourage your investor client not to discount the property below a level where their current loan will not be paid off unless they bring a significant amount of money to closing (unexpected cash out of pocket is bad).

You mean I have to actually educate my investor client on this? Yes, you do. You need to educate your investor client because you can’t assume your investor client already knows this. Most investors I know do not know about this MLS listing problem. These investors saw a television show on Saturday and decided they too were going to flip a house and make it big. We all know you can successfully flip houses and make money. Not everyone knows the hidden alligators waiting to bite at your ankles.

I always assume my investor clients know very little if anything and I help them along in the process. This works for me their investor agent because it causes fewer problems along the way, and it works for my investor client because he or she has a less bumpy experience and doesn’t get stuck with paying more than $9,000 plus expenses at a refinance.

Always know the type of financing and terms of the financing your investor client has, and work off of knowing this information to help your investor client succeed. Your investor client's success means success for you.

"What if the investor client is using cash to do the real estate flip, the MLS listing problem probably doesn’t come into play right?"

The answer is yes it does come into play in the same way if the investor client doesn't sell the property and wants to refinance and pull out his or her cash. The investor client is only going to be able to get a refinance loan for up to 75% of the last listed MLS price. This could potentially mean the investor leaves some of his or her cash on the table because the refinance loan amount isn’t enough to cover all of the cash the investor client has into the property. I will tell you though there is a much bigger problem using cash and refinancing than the MLS listing problem.... Stay tuned for more information on this one.

Have a happy and prosperous weekend!

Comments (1)

Rodney Mason
Guaranteed Rate NMLS# 2611 - Atlanta, GA
VP of Mortgage Lending - AL, FL, GA, SC, & TN

You are correct that an underwriter is not going to accept a value that exceeds a recent list price.  The Secondary Market has made it more difficult to pay off non-institutional lenders (i.e. hard money lenders).

Feb 12, 2011 02:23 PM