How Can I Win a Bid on Fourplex with FHA Financing?

18 Replies

Hi BPers...I'm an investor in South Florida and looking to utilize an FHA loan to purchase a fourplex. There are a lot cash buyers in this market and obviously cash is king, so please provide any advice on competing for bids when my financing will be through FHA. As I understand it, many sellers don't want to deal with FHA due to the lengthier processing time.

Has anyone been successful with navigating this?

The hesitancy about FHA isn't particularly the time, it's twofold; 1) The property condition must meet FHA standards, which are fairly stringent. 2) Any financed deal may fall through because the borrower may not actually qualify. To help alleviate this concern, make sure you have a True preapproval-having submitted 2 years of tax returns, last two bank statements, all debts revealed, etc-and have your lender specify that these have been specifically reviewed.

and the highest offer

Thanks Wayne...that's helpful to know. I'll do some more research on the property standards. 

Originally posted by @Wayne Brooks :

The hesitancy about FHA isn't particularly the time, it's twofold; 1) The property condition must meet FHA standards, which are fairly stringent. 2) Any financed deal may fall through because the borrower may not actually qualify. To help alleviate this concern, make sure you have a True preapproval-having submitted 2 years of tax returns, last two bank statements, all debts revealed, etc-and have your lender specify that these have been specifically reviewed.

Wayne is on the right track except that that a lender issues a "pre-approval" letter does not mean that the loan will be funded in all cases.  The pre-approval is still subject to meeting all underwriting guidelines and the property appraisal must be sufficient as well.  I presume you are planning to live in one of the units and rent it the other 3 units.  Your going to be competing with seasoned investors with no plans to occupy and the cash (of their own or from a private money lender + some of their own) who is looking to acquire the peppery for the cash flow,  appreciation, and depreciation that comes with it.  It's not impossible to win in this arena...but you've got your work cut out for you when relying on normal channels for acquisition capital.

@Lakila Richardson  When competing with cash offers, the closest you can come with a mortgage loan is a Fully Approved Loan. This is where you go through full underwriting review and approval. So your loan is as good as approved with a few conditions.

Find a banker that can get you a Fully Approved letter, not just a Pre-Approved letter.

Good luck.

Upen Patel
Mortgage Banker

Thanks for your insight @Charles Fitzgerald ...given the difficulty in winning a bid against cash, is it possible to purchase with cash and then go on to apply for an FHA loan after I've purchased the property?

Thanks for your insight @Charlie Fitzgerald ...given the difficulty in winning a bid against cash, is it possible to purchase with cash and then go on to apply for an FHA loan after I've purchased the property?


Originally posted by @Charlie Fitzgerald:

Wayne is on the right track except that that a lender issues a "pre-approval" letter does not mean that the loan will be funded in all cases.  The pre-approval is still subject to meeting all underwriting guidelines and the property appraisal must be sufficient as well.  I presume you are planning to live in one of the units and rent it the other 3 units.  Your going to be competing with seasoned investors with no plans to occupy and the cash (of their own or from a private money lender + some of their own) who is looking to acquire the peppery for the cash flow,  appreciation, and depreciation that comes with it.  It's not impossible to win in this arena...but you've got your work cut out for you when relying on normal channels for acquisition capital.

Thanks Upen! I'm working with a mortgage broker...I'll speak with him about that!


Originally posted by @Upen Patel :
@Lakila Richardson When competing with cash offers, the closest you can come with a mortgage loan is a Fully Approved Loan. This is where you go through full underwriting review and approval. So your loan is as good as approved with a few conditions.

Find a banker that can get you a Fully Approved letter, not just a Pre-Approved letter.

Good luck.

Upen Patel
Mortgage Banker

You won't be able to get a "Full Approval" without an appraisal...and depending on your bidders deposit requirements, your risking that cash if for whatever reason, you can't borrow the balance due in time.  Be careful.  This is a slippery slope way to acquire a property.

Charlie

@Lakila Richardson

Don't worry too much about the property condition unless the place is falling down and abandoned. If it's occupied and in at least fair condition the appraiser shouldn't come up with too many crazy items to fix. There may be items to fix but make it clear to the seller that you intend to make any of the repairs as long as he/she gets you access to the areas you need to access. 

@Lakila Richardson

The owner of the building is also an investor. I wouldn't hesitate to include some sort of cover letter with your offer explaining what you're trying to do and that you will do whatever it takes to get the deal closed.

Originally posted by @Charlie Fitzgerald :

You won't be able to get a "Full Approval" without an appraisal...and depending on your bidders deposit requirements, your risking that cash if for whatever reason, you can't borrow the balance due in time.  Be careful.  This is a slippery slope way to acquire a property.

Charlie

Charlie, one of the conditions on a Fully Approved loan is that the appraisal comes in above the loan amount and the title is clean. Its NOT a slippery slope, as long as the buyer is bidding on a property at the right price. If the buyer is bidding $200K for a $150K property, then not getting the loan approved are the least of their worries.

Upen Patel

As you know, the bank is going to lend on the appraised value, so in your hypothetical, the fact that a buyer is willing to pay $50,000 over FMV does not eliminate the stringent FHA requirements for the appraisal relative to property condition, area market rents, etc. (Thus is a 4-plex property.) There are dozens of reasons why pre-approved buyers get into a contract to purchase and then can't secure the financing. Statistically, with the tightened lending guidelines in the post Dodd-Frank environment, banks end up funding somewhere in the neighborhood of 65% of the loans that borrowers apply for. After the next changes roll out on October 3rd, 2015, cash buyers will have an even bigger advantage over financing buyers.

@Lakila Richardson What you really need in this whole process is two things. A knowledgeable agent and a good lender.

Do you mind expounding? 

Originally posted by @Russell Brazil :

@Lakila Richardson What you really need in this whole process is two things. A knowledgeable agent and a good lender.

A good agent is going to know what it takes to win a bid. You are being beat out by all cash offers. A good agent will know how much you are going to need to bid over to make the seller take your offer. Maybe it is an escalation clause going a certain percentage above existing offers. Maybe it is using a certain lender whose preapproval letter carries more weight than other lenders. A good agent is also going to have a pretty good idea of how much the property will appraise for and thus know if you even can outbid the all cash offers. A good agent will know if the property will pass or come close to passing an FHA inspection.

A good agent is going to be able to tailor an offer to win (at some point, maybe not the first offer) if they know the market properly.

In my own market, I know what offers need to be made on what houses.  I know where I need to make an offer $100k over list price with no contingencies, or where I can make a lowball offer.  If the listing agent is from a certain brokerage, I know they are going to give more weight to preapproval letters from certain lenders.  I have a good rapport with many agents so I can talk candidly to them and find out what is going to get a deal done.

Do not under estimate the power and knowledge of a good agent.  If you do not have someone like this...then find someone. Also be prepared for the possibility that the agent will tell you things you might not want to hear, such as you have zero chance of acquiring a particular property. But then hopefully he is going to point you towards properties you can acquire.

That was extremely insightful! Thank you for the additional detail. I've been doing a lot of preliminary work to prep financially and expand my existing Real Estate portfolio and the advice you've given can be applied to many areas!

Again, I really appreciate the detailed and actionable feedback. Too bad you're not in my market. :-)

Originally posted by @Russell Brazil :

A good agent is going to know what it takes to win a bid. You are being beat out by all cash offers. A good agent will know how much you are going to need to bid over to make the seller take your offer. Maybe it is an escalation clause going a certain percentage above existing offers. Maybe it is using a certain lender whose preapproval letter carries more weight than other lenders. A good agent is also going to have a pretty good idea of how much the property will appraise for and thus know if you even can outbid the all cash offers. A good agent will know if the property will pass or come close to passing an FHA inspection.

A good agent is going to be able to tailor an offer to win (at some point, maybe not the first offer) if they know the market properly.

In my own market, I know what offers need to be made on what houses.  I know where I need to make an offer $100k over list price with no contingencies, or where I can make a lowball offer.  If the listing agent is from a certain brokerage, I know they are going to give more weight to preapproval letters from certain lenders.  I have a good rapport with many agents so I can talk candidly to them and find out what is going to get a deal done.

Do not under estimate the power and knowledge of a good agent.  If you do not have someone like this...then find someone. Also be prepared for the possibility that the agent will tell you things you might not want to hear, such as you have zero chance of acquiring a particular property. But then hopefully he is going to point you towards properties you can acquire.

Hi @Lakila Richardson

Were you ever able to find anything? I'm also looking to house hack in South Florida, particularly Broward County. 

I've been looking since December and am finding it hard to find properties with a decent cash flow.

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