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Mortgage Morons Vs Flip Buyer's

By Herb Hamilton

Real Estate Agent with RE/MAX Preferred Inc. Realtors

November 07, 2007 01:20 PM

I just don't get it! Someone please tell me what the rationale is behind what appears to be standard fare in the lending industry. What I am talking about is the reluctance of Lender's to approve mortgages for Investors of Flip Properties especially over the last couple of years. I have been confronted with this reoccurring problem of financing Flip's in the Portland Market over and over again and it just does not make sense to me.

Is this my fault. Maybe I have just not reached out to other Lenders enough to insure this will not be a problem in the future. So what is the Problem you ask?

Well here is the scenario.

( A ) buys a property from ( B ) a cash sale that closes in 10 days
( A ) then sells to ( C ) for an escalated price.
( C ) purchases using a conventional loan due to close in 30 days

Now I know many of you are wondering if this is some sort of scam or something by the Buyer's. Perhaps they are in collusion trying to defraud the Lender. Or perhaps this some sort of elaborate money laundering scheme. Or worse yet someone has taken advantage of an Old Lady who does not know any better.

NO NO NO! It is none of that. It is strictly on the up and up.

Here are the facts. (A) is an all cash Investor who is constantly on the lookout for flip properties where he can make a profit.

Similar to Investors who buy and sell ( flip ) foreclosures. This Investor is not interested in Foreclosures as they tend to be more paperwork and often a lot slower due to the way most lenders handle REO's and Foreclosures. He would prefer just to keep his eyes on the market and look for opportunities.

Investor ( C ) also a client of mine is a Fixer Buyer who rehabs homes for resale. He tends to finance them and is also looking for deals that will make him money.

Enter property ( X ). This property came on the market about a month ago. The Listing agent had it mis-described in the listing calling it a 3 bedroom home. In Reality it was a Duplex with 8 Bedrooms on an over-sized lot in Irvington a very desirable neighborhood in Downtown Portland. The Price was about $350,000.

Buyer ( A ) received the new listing information from My_Investor's_Web_Site at about 7:00pm that evening and called me. By 8:30pm we had previewed the property together and written a more than full price offer. By the following morning we had acceptance by the Seller.

The terms was an all cash sale to be concluded within 10 business days and a 3 day inspection period. It was during the inspection that Buyer ( A ) mentioned he might possibly flip this property rather than keeping it. He asked me to shop it around.

By the end of business on the final day for inspection Buyer ( A ) had made his final decision to flip the property. Before the end of business that evening I presented him with Buyer ( C )'s offer. The deal was accepted. By the end of the following week Buyer ( A ) closed on the house and Buyer ( C ) submitted his paperwork to his lender for a loan.

The appraisal on the property for Buyer ( C ) went off with out a hitch. In fact the appraiser said that he had a hard time finding comps in that low of a price range. This was no surprise to any of us. We had all felt that the property had been grossly under sold.

All was smooth sailing until the Underwriter starts squawking a bit about this flip and why was Buyer ( A ) making money in such a short period of time.

I ask you, what the **** is it of their business. Certainly I completely understand that they should be cautious and ask questions to make sure there are no cases of fraud or dirty dealings. But when the credentials of all parties are above reproach with a 15 + year history of these type of transactions with zero complaints. And further more the appraisal and verified Comps all indicate a vastly under marketed property in the first sale, then I just don't get it.

Is this some sort of envy or plot to keep legitimate Investor's from making a living? Are you a Loan officer or Mortgage Banker? Have you run on to this as well? Perhaps you can give me an explanation that makes sense.

************** UPDATE***********

Finally after writing this post and invoking as much emotion as I could without become vulgar " I ask you, what the **** is it of their business". Full well knowing that it is of course the Lender's money. I just did not have the full explanation of what the problem was.

Thanks to Mark_Pandzich_of_Wells_Fargo and his in depth explanation below. There is no more ambiguity.

Your 1st buyer buys house with cash under market value. Cash Buyer contracts new sale at higher amount to your 2nd buyer, a fix and flipper. Mortgage Broker originates and packages deal to wholesaler, makes 101.00 to 102.00 on deal. Wholesaler repackages loan, sells it to investor for another 101.00 on the deal themselves. Investor sells it to a servicer for another bit of profit. At this point, your 2nd buyer has "fixed" the property and is now flipping it for sale and pays off the loan. Most likely he's sold it in less than a year, which is not enough time for the cost of the loan to pay for itself (the cost being the income made by the broker, the wholesaler and the investor). The servicer gets caught holding the bag with nothing to show for it. Banks are in the business to make money, not give it away.

Thanks Mark!

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K C

Independent Leadership & Financial Fitness Consultant - Pleasant Grove, UT

Herb,

You ask the Golden Question, one that has plagued the mortgage industry for years. I've been in mortgage lending for over 10 years, and I've always been told by underwriters that the bank looks at value as the appraisal value or purchase price and it's which one is less. So if I sell a home for 450k but it's really worth 500k, and even if I can prove with 500 comp's that it's worth 500k, the lender still looks at it as 450k. Now in the past there were not as many of these investment seminars, and not as many what we call Equity Strippers in the business. Lately these programs have been marketed by unscrupulous marketers looking for unknowing investors. The result is allot of homes that are purchased low, stripped of their equity, and then when the owner realizes what happens they often allow them to fall into foreclosure.

So banks began demanding 12 month, then 24 month chain of titles during underwriting. The banks are aware of pseudo double contracting that many of these investor guru's push in their seminars. I even remember when you can add someone to title, and then act as if the transaction was a refinance as to avoid the down payment.

So it basically comes down to risk. I used to see it the way your seeing it as well. Why in the heck is a property all of a sudden worth less just due to the purchase transaction. The problem isn't necessarily what your doing with your clients, it's because so many are stripping equity and putting the investors or buyers into dangerous situations. Also their was rampant situations where very little to no down payments were made on these investment homes. So with no skin in the game, the banks then assumed all the risk.

The reality is that the deal your working on is one that banks simply do not like at this point. There are a few companies that still will allow "no seasoning", but they are becoming fewer every day. I'm thinking that it's going to be difficult to traditionally finance this type of transaction unless you wait six to twelve months.

There also maybe a number of other issues they may have with the county, the neighborhood, or with the com-parables. There are some counties in Florida where some lenders like Wells Fargo will not even touch the loan. We just had two loans crash in Lee County, Florida.

You may want to have a long talk with your mortgage partner. Either they are going to have to do more research or your going to have to change your strategy for future deals.

Nov 07, 2007 01:41 PM

Missy Caulk

Missy Caulk TEAM - Ann Arbor, MI

Savvy Realtor - Ann Arbor Real Estate

Well, have you ever? If it appraised, what's the big deal.

Nov 07, 2007 10:14 PM

Herb Hamilton

RE/MAX Preferred Inc. Realtors - Portland, OR

Real Estate Broker ,CDPE, Downtown Portland

Karl : Thanks for giving such a detailed answer to my rant. I guess that I am really looking to establish a new relationship with a lender that is interested in loans for fixers or flips. I do understand as you mention above that there have been times in the past where Th first investor hyped the sale and an auction fever sort of took over the second investor buyer. Later only to find out that there was not money to be made and the fell flat.

We had a local bank here that was providing the loans.THey looked at what the assest would look like value wise after the proposed rehab as well. This was good for the lender as it allowed them of having a current condition appraisal and a future value as well.

Any Lenders out there or mortgage people who are aware of someone I can call?

Nov 08, 2007 12:53 AM

Herb Hamilton

RE/MAX Preferred Inc. Realtors - Portland, OR

Real Estate Broker ,CDPE, Downtown Portland

Missy : No flips going on there in Ann Arbor? Thanks for stopping by.

Nov 08, 2007 12:55 AM

Anonymous

Irvington is Downtown Portland?

Banks and their agents are a little more skeptical about loaning money out now that the mania has passed. So to answer the question "what the **** is it of their business[?]", it is almost entirely their business. It is their money.

Nov 09, 2007 03:34 AM

y y

/LSONHC';/.c - Denver, CO

"what the **** is it of their business."

Well, like the last post said, it's their money. They're only going to borrow it if they feel they'll get their money's worth.

2 years ago, you could go to any Alt-A lender and they wouldn't even blink at a property transferring hands twice within 6 months. As long as values were met and borrowers qualified, close the deal. It was simply a numbers game. But once reality hit and sites like http://www.mortgagefraudblog.com/ started to show the seedy underbelly of the mortgage industry, investors started to think twice about these deals. Even on legitamite deals, where values weren't compromised, here was where investors started to change their minds:

So now we have a little rule in the conventional residential arena: no transfers of title in the last 90 days. Some banks go back 6 months; some even 1 year. If you want to try to avoid this rule, you need to find a private investor, or HARD Money lender. These are the folks that'll do the dirty work , but charge you amply for it- 2 to 6 points up front for a high interest loan, most likely a 12 -24 month balloon. It may not be pretty, but if you want it, you got to pay for it. Some will even go off of appraised value over sales price. You can always find several lenders doing hard money here.

Hope this helps explain things a little.

Nov 21, 2007 02:15 PM

Herb Hamilton

RE/MAX Preferred Inc. Realtors - Portland, OR

Real Estate Broker ,CDPE, Downtown Portland

Thanks for the in depth explanation Mark. Exactly what I was looking for. I did have a small piece of the information prior to writing the post but was never given the whole picture which just left me frustrated. Hence the tone of the post above.

I have updated the post above to include your well thought out and succinct comment. Thanks again.

Nov 22, 2007 02:53 AM

y y

/LSONHC';/.c - Denver, CO

Herb, glad I could help. Again, if you are looking to do those types of quick turn transactions, I would look into Hard Money lenders at sites like Scotsmanguide.com. Have a great weekend!

Nov 23, 2007 02:32 AM