BiggerPockets

How is everyone doing selling their rehabs to FHA buyers? I'm finding it too much of a pain and would rather hold for conventional buyers. Anyone care to share stories or thoughts?

The main issues for a rehabber with an FHA buyer are:

1. Typically the selling price is more than 20% higher than the acquisition cost,
2. Often, the sale is less than 90 days after the acquisition.

Therefore, the FHA lender requires two appraisals and uses the lower one. Appraisers are all over the place these days so the seller has to be lucky twice in order to get it appraised for contract price, and this does not happen often.

And FHA buyers typicall have no cash. So if it appraises for less, you have to lower your price to the appraised value or put the property back on market, thus having wasted your time.

I recently paid the damned 3.5% down payment for an FHA buyer just to get rid of a fix n flip. Still profitable but more stressful than necessary.

Over the years I don't think I ever list a property for sale as being available for FHA or VA. Some ended up that way, but I would not even consider doing FHA today, at least not a property that was in my pocket! Well, that's IMO!
And the properties were not slums either, it's quicker, easier and in the end, more profitable, especially if I did a wrap or installment deal and then refinanced it for them conventionally. Sorry to hear you're having trouble...Good lock, Bill

Totally different story in my market.

Here is the way I look at it... with FHA guaranteeing almost 70% of all mortgages it doesn't make sense to artificially limit the number of potential buyers.

While FHA requirements can be a pain... as mentioned a lot depends on the lender, I have found that those investors who adjust their business approach to deal with FHA buyers are making more then reasonable profits... quickly.

Best of luck!

I sell all my flips almost exclusively to FHA buyers (always over 20% of what I paid). I have done pre-90 day deals.

1. The lender you use is the most important part of the transaction. Force the buyer to use your lender or don't put the deal in escrow.

2. Underwriters are asking to see the Home Inspection reports and make some outlandish requests.

3. Meet the appraiser at the property and give them a package that shows them details on the repairs you made.

4. Ask to see the conditional approval list. The doc conditions and the funding conditions.

5. The transaction will take sometime. 30-45 days to close, in my experience.

Originally posted by Vikram C.

1. How do you force a buyer to use your mortgage broker? What if the are reluctant to do so?

In my experience, you shouldn't force a buyer to use your broker, but you should provide incentives for him to do so. Here are the incentives I provide to buyers who use my broker:

- I pay for their inspection
- I pay for their appraisal(s)
- They can put down less in EM
- They have longer financing contingency
- They have longer appraisal contingency
- They can have extensions to the close date if there are issues

The one exception is if it's an FHA sale pre-90 days. I don't know many lenders who can get this done, but mine certainly can. So, in these cases, I insist that the buyer use our broker/lender, or we won't accept the contract.

2. Typically what percent of closing costs are you willing to pay if they use your lender?

For FHA, the legal maximum is 6%. I always factor 6% into my formulas as a worst-case, and will pay up to that amount. Many times they ask for less.

3. Does the EMD go hard after the 14-day appraisal contingency?

EMD goes hard after all contingencies are cleared, which is generally after 14 days.

4. Do you mention the $100 day at the time of extending the deadline to close or do you have that mentioned upfront at the time of signing the contract?

I let them know that if they use my lender and closing attorney, they can have as many extensions as necessary to get it closed (assuming the buyer doesn't do something stupid like mess up his credit). In other words, if it's my broker or attorney that is holding things up, I'm willing to take all the risk without penalizing the buyer.

If the buyer uses another broker/attorney, I let them know that if they can't get the job done in the time allotted in the contract, I'm not going to be very flexible about extensions. But, I don't mention the $100/day up-front. I like to let them think I'm going to keep their EM, and then offer the $100/day as a concession.

Of course, I'd prefer they use my team, in which case none of this is an issue, as I'll gladly extend the contract if my team is slow.

5. Do you also have some provision in your contract to prevent the buyer from asking for frivolous repairs?

We let the buyer/agent know up-front that our utmost concern is safety. If the inspector finds any safety issues, we'll fix them no-questions-asked. We'll also pay to fix something that we should have gotten right the first time (for example, in my last house, the vinyl flooring in the kitchen wasn't staying glued down very well, so we completely replaced it before they moved in without them even asking).

But, we don't pay for frivolous repairs unless they've made a very strong offer and we really don't want to risk the deal.

And we don't put any of this into the contract, as I'd prefer to deal with these things on a case-by-case basis. Generally, by the time the buyer has had their inspection, they are very emotionally vested in the property, so I'm not really worried about losing them due to refusing to make upgrades.

J Scott-

I second Vikram. That is very good stuff to know. Once again, great advice from you. Thank you for taking the time to respond.

My FHA experience wasn't too painful.It was long but it wasn't bad. If you are selling in less than 90 days you can expect to have two appraisals done. If you are also selling for more than 100% of purchase price that will also require 2 appraisals.

For all appraisals it is crucial to meet the appraiser at the property so you can walk them through everything you have done to the property. At the end I give them a folder with the comparable sales, a list of the improvements I have done to the house and pictures of what the house looked like before.

I have done this on 4 appraisals and it has worked every time plus I have added an appraiser to my network which I have called later on for appraisal questions on other properties.

Although in concept I agree with J's recommendations on getting them to use your lender in reality people are hesitant to do that. Not so with the closing attorney, they usually don't care. However, both are great suggestions and I am working on how to get them to use my lender.