You Sure You Want to Sell To An FHA Buyer?
Chances are, if you are fixing and flipping properties on the retail market today, you have sold properties to FHA buyers. Interestingly, almost 25% of all purchase loans last quarter were FHA loans. I know in my market, it seems like almost every offer I get on a retail project comes from a buyer attempting to obtain an FHA loan. Just last week in fact, I had an offer come over from an FHA buyer and was reminded again how much I don't like dealing with the FHA requirements imposed on me as a seller.
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I remember a couple of years ago, when investors couldn’t even sell a property to an FHA borrower if the property had not been owned for at least 90 days. Luckily, FHA came to their senses and agreed to stomach the notion that an investor actually could renovate a property and legitimately increase its value. While this was definitely a step in the right direction, FHA still places a heavy burden on a seller attempting to sell a property to an FHA borrower.
FHA Guidelines and the Second Appraisal
I was reminded of this when the selling agent called us up a few days after execution of our purchase and sale agreement to inform us that the lender was going to require 2 appraisals and that we would have to pay for one of them. That's right, FHA guidelines stipulate that if the seller has owned the property for less than 90 days AND is making a "profit" of more than 20%, two appraisals will be required and the borrower can only pay for one of them. (I put the word "profit" in quotations because FHA simply looks at the original purchase price compared to the new selling price. We all know that with renovations, closing costs, holding costs, etc. – this is definitely not all "profit") But the bottom line is you as the seller are almost always going to get stuck paying for this second appraisal.
This may not seem like a big deal – just a few hundred bucks in concessions to help get the deal closed. That may be true, but I see this appraisal cost as a huge gamble. I’ve had too many FHA loans not close and too many appraisals come in low to put that money out there for a buyer I don’t know anything about.
As an aside, I personally like to try to push this expenditure out as close to the closing as I can. As was the case with this last deal, I negotiated that we would only pay for this second appraisal after the first one had been completed (and came in at value) and the buyers were outside of their financing contingency. I’ve also heard of investors negotiating with the loan officer to pay for the second appraisal out of pocket with an agreement to get reimbursed by the seller at the closing table. This way, you at least know the deal is getting closed before shelling out the cash.
FHA Is Going to Tell you What To Fix and Make You Pay For It
The other guideline that sellers need to be aware of when working with an FHA buyer is the inspection and subsequent repairs. In a conventional deal, buyers and sellers typically negotiate which repairs will be completed and which ones will not. In an FHA transaction, the underwriter determines what repairs need to be made (based on a mandatory inspection) and the borrower is not allowed to pay for any of these repairs. That's right, the seller is once again on the hook for costs that could arguably have been passed on to the buyers.
I don’t know about you, but there is something about these impositions on me as a seller that just rub me the wrong way. Why should I as a seller have anything to do with somebody else’s financing? Why should I be asked to spend speculative dollars on appraisals and repairs for somebody I don’t even know?
Regardless of my feelings about these FHA guidelilnes, the fact is that a quarter of my potential buyers are going to fall under these rules and I need to be prepared. As investors, it’s important that we understand the system that we operate in and learn how to navigate these types of challenges.