Financing a fix and flip through a traditional bank
Investor · Bronx, NY · Member since 2015 · 10 posts · 6 votes
Hello All
I am a Newbie looking to do my first fix and flip in the New Jersey area and I currently have a property under contract. I am thinking about getting a loan from a traditional bank since the interest rates are not as high as the private money lender. My lender has informed me that if I get the loan and I sell the property under a year then this would be flagged and there could be some implications. So my question is, anyone used a traditional bank to finance the flip and sell in less than a year? Did you get in trouble for doing so?
Many thanks for your response.
Jodi
Jodi - Loan officers often do a terrible job of explaining the different types of loans available, why those loans have different underwriting requirements, and why they will or won't work for different purposes. They often don't ask the necessary questions. Being a new investor, this leaves you having to figure out things on your own when the lender or mortgage broker really should have asked the necessary questions and given you the necessary explanation of loan options.
The key for you is to be sure to let any potential lender know the purpose of the loan and your basic plan with the property. Buying the property in order to make it your personal residence is entirely different than purchasing for investment purposes in the eye of the lender/underwriter. The lender may also view a fix/flip much differently than a situation where you will be holding the property long-term.
If you make it clear what the current condition of the property is, as well as the basics of your short-term and long-term plans for the property, then any decent mortgage broker or loan officer should streamline the conversation so that you aren't wasting time talking about or applying for loans which are not appropriate for your situation.
Also be aware that many mortgage brokers or loan officers have steered investors into loans which are inappropriate for the borrowers' investment purposes either because it earns them (the broker/loan officer) a higher commission or because they did not ask the right questions. In such a situation, if you aren't asking questions and reading the fine print, you could unwittingly commit mortgage fraud.
My direct answer to your question is, yes, I have financed dozens of short-term fix/flips through what you refer to as "traditional" banks. Most were small local banks who wanted to see investments in the local community made by someone with long-term, local interests. Since 2007, it is much harder to get comparable loans, and it may not be a reasonable possibility for a new investor unless there is substantial other collateral to offer the bank.
However, I think the better answer to your question is that you are not having the right discussion with the lender. If the lender you spoke with understood that you want to buy, fix/remodel, and quickly sell the property, then there would be no need for discussion about "flagging" and "implications." You will never "get in trouble" if you are honest and up-front about everything in discussions and in writing. Don't trust any lender / mortgage broker / loan officer to look out for your best interests and protect you. Communicate clearly, read everything, and don't sign anything unless you know what it says and it has the correct information.
Bear in mind that every bank is different, as are the types of lending each can and will do. Smaller, local banks may make loans that others won't. They have their own goals and requirements for their lending portfolios, and those change over time for any given bank. Sometimes you just need to talk to a lot of banks. Get to know and develop relationships with the banks and people you like - personal relationships can help overcome barriers or streamline the process, although the loan underwriting requirements will still need to be met.
I hope this helps. Good luck!
It depends on the type of loan you are getting from a bank. I would look into the details of the specific loan you are trying to get. Some loans (i.e. FHA, VA, HUD, etc.) might have certain stipulations applied. Ask the loan officer which loans would raise a flag and which will not cause problems and then go with one that will not cause issues.
Good luck,
Allen Fletcher
Short answer is yes used a bank and no didn't get in trouble. Here was the scenario:
1) Didn't use a government back loan of any type. FHA and other agency lenders will flag that transaction
2) Be prepared to bring more to close if you want to get around using an agency lender
3) Typical terms I found from a bank are 1 point, 4.75% interest only with 30% down of the total cost of the project on a 20 year amortization. This looks like a commercial loan and it is basically.
Food for though on the next few deals though. Why not that private investor financing? The interest rate would be higher but if you are putting in less of your cash in the deal then your return on cash would be much higher. PM me and i can walk you though why I like private investor financing much better.
If you have decent credit and credit history, and the amount that you need isn't too large, you can pull a personal loan or line of credit. Even high limit credit cards. It's a risk and I'm not an adviser, but if you want to avoid private/hard money, that is about as close as you would get. Every hard money lender has their perks and differences. If you are doing a fix and flip and you invest in the right property with careful due diligence, the return you would get from it really outweighs the costs of a private or hard money loan. Most of them do not have pre-payment penalties for those programs and are interest only. If you decide to purchase and hold to rent out, traditional banks are a good option when you are shopping around as long as the property is up to par with inspection.
@Allen Fletcher Thanks. The loan would be a HUD and the loan officer did mention that it could raise a flag.
If I use a private money lender then I don't think the deal would be worth it because the profit would be too low.
Jodi - Loan officers often do a terrible job of explaining the different types of loans available, why those loans have different underwriting requirements, and why they will or won't work for different purposes. They often don't ask the necessary questions. Being a new investor, this leaves you having to figure out things on your own when the lender or mortgage broker really should have asked the necessary questions and given you the necessary explanation of loan options.
The key for you is to be sure to let any potential lender know the purpose of the loan and your basic plan with the property. Buying the property in order to make it your personal residence is entirely different than purchasing for investment purposes in the eye of the lender/underwriter. The lender may also view a fix/flip much differently than a situation where you will be holding the property long-term.
If you make it clear what the current condition of the property is, as well as the basics of your short-term and long-term plans for the property, then any decent mortgage broker or loan officer should streamline the conversation so that you aren't wasting time talking about or applying for loans which are not appropriate for your situation.
Also be aware that many mortgage brokers or loan officers have steered investors into loans which are inappropriate for the borrowers' investment purposes either because it earns them (the broker/loan officer) a higher commission or because they did not ask the right questions. In such a situation, if you aren't asking questions and reading the fine print, you could unwittingly commit mortgage fraud.
My direct answer to your question is, yes, I have financed dozens of short-term fix/flips through what you refer to as "traditional" banks. Most were small local banks who wanted to see investments in the local community made by someone with long-term, local interests. Since 2007, it is much harder to get comparable loans, and it may not be a reasonable possibility for a new investor unless there is substantial other collateral to offer the bank.
However, I think the better answer to your question is that you are not having the right discussion with the lender. If the lender you spoke with understood that you want to buy, fix/remodel, and quickly sell the property, then there would be no need for discussion about "flagging" and "implications." You will never "get in trouble" if you are honest and up-front about everything in discussions and in writing. Don't trust any lender / mortgage broker / loan officer to look out for your best interests and protect you. Communicate clearly, read everything, and don't sign anything unless you know what it says and it has the correct information.
Bear in mind that every bank is different, as are the types of lending each can and will do. Smaller, local banks may make loans that others won't. They have their own goals and requirements for their lending portfolios, and those change over time for any given bank. Sometimes you just need to talk to a lot of banks. Get to know and develop relationships with the banks and people you like - personal relationships can help overcome barriers or streamline the process, although the loan underwriting requirements will still need to be met.
I hope this helps. Good luck!
Thanks @Tim Rettmann