FHA Loan not welcomed by Sellers

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FHA Loan not welcomed by Sellers

Matt N.
Investor · Washington, DC · Member since 2016 · 51 posts · 14 votes

My plan is to purchase a multi-family with an FHA loan. Multi-families in my area are priced 400-600k. I was speaking with one of the listing agents and she said seller puts offers with FHA in fourth place after cash, conventional and 203k loans because its got a lot of compliance strings attached to it. So if I submit an offer with an FHA my chances are already lower than others. So what's the next best for me as the buyer? Do all conventional and 203k loans require 20% down payment? I can stretch out and put 15% down but 20% is out of my range. Any advice? Lenders?

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Chris MasonPro Member
Moderator
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
9y

Hi @Matt N.,

203k is a type of FHA loan. "Normal" FHA loans are 203b. Still 3.5% down, but 203k is a renovation product, so the condition of the property is irrelevant because your plan is to finance repair costs from the get-go. That's why they like FHA 203k over FHA 203b. 3.5% down, owner occupants only.

Best bet with FHA for MFR in hot markets, frankly, is to find them off-market. I only do a few each year, mostly off-market, because it's so hard to get offers accepted if it's an MLS property.

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  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    9y

    Agent is bound to submit ALL offers to the seller who decides which to accept.

    FHA is biased towards SFRs, and not MFUs, so the agent is actually doing you a favor. MFUs will require a better LTV downpayment and if you can't get to 20-30%, then you're not ready to step up to FMUs.

    1Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    9y

    Hi @Matt N.,

    203k is a type of FHA loan. "Normal" FHA loans are 203b. Still 3.5% down, but 203k is a renovation product, so the condition of the property is irrelevant because your plan is to finance repair costs from the get-go. That's why they like FHA 203k over FHA 203b. 3.5% down, owner occupants only.

    Best bet with FHA for MFR in hot markets, frankly, is to find them off-market. I only do a few each year, mostly off-market, because it's so hard to get offers accepted if it's an MLS property.

    3Reply
  • Mindy JensenPro Member
    BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
    9y

    @Matt N. , while you are looking for your property, save every bit of money you can and try to get to that 20%.

    As an agent, I explain to my sellers what an FHA loan can do to the sale of the property. If you get a cranky FHA appraiser and the property doesn't appraise at the right price, it sticks to the property for 4 months.

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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    9y

    When using an FHA or VA loan it puts you at a disadvantage. Your agent should be able to help you structure the offer to compete against other offers though. Since you mentioned you spoke with a listing agent, it sounds like you don't have your own agent. In a competitive real estate market like DC, you will never be able to compete unless you have an agent who knows how to get the deal done.

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  • Upen PatelPro Member
    Lender · Nationwide Lender · Member since 2015 · 1k+ posts · 814 votes
    9y

    @Matt N.. He knows his stuff.

    [email protected]571-200-6180
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  • Brendan R.
    Investor · Lancaster, PA · Member since 2016 · 48 posts · 28 votes
    9y

    I purchased a two unit with an FHA loan in August. When my agent was writing the offer he tried to talk me into every other imaginable scenario to avoid submitting the FHA offer. I made every other aspect of the offer as easy as possible for the seller. We waived a buyer's inspection but still had the FHA appraisal to fall back on and mortgage company required a termite inspection. If you are using FHA financing for a multi unit in a competitive market I would recommend making every other aspect of the offer as appealing to the seller as possible.

    I was also inside the house a few hours after it went on the market, got an offer in quick and under contract within 48 hours of it going on the MLS.

    1Reply
  • John Newhall
    Real Estate Agent · Bloomington, MN · Member since 2015 · 87 posts · 30 votes
    9y

    I closed a sale with a FHA loan, for a client, on a duplex this last spring. We had to get the inspector back 3 times because they kept finding peeling paint they didn't like. It was a nonprofit selling it and I actually walked around with the painter pointing at things I wanted him to paint.

    We got it closed though.

    0Reply
  • Matt N.
    OP
    Investor · Washington, DC · Member since 2016 · 51 posts · 14 votes
    9y

    Thank you all for your valuable input. 

    I am in a situation now. I have submitted an offer on a multi-family based on FHA loan. I am the only offer the Seller received (up to now that I know). I have increased my price once responding to Seller's counter offer. However the Seller is not willing to accept my offer. I have waived inspection contingency. What else can I change to persuade the Seller to accept? I can increase the price another $25k but I am only going to do so if I am sure the Seller will accept FHA. Any ideas or suggestions?

    0Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    9y
    Originally posted by @Matt N.:

    Thank you all for your valuable input. 

    I am in a situation now. I have submitted an offer on a multi-family based on FHA loan. I am the only offer the Seller received (up to now that I know). I have increased my price once responding to Seller's counter offer. However the Seller is not willing to accept my offer. I have waived inspection contingency. What else can I change to persuade the Seller to accept? I can increase the price another $25k but I am only going to do so if I am sure the Seller will accept FHA. Any ideas or suggestions?

     Assuming you are using the standard gcaar contract, the type of financing is clearly laid out on page 1 of the contract.

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  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    9y
    Originally posted by @Matt N.:

    Thank you all for your valuable input. 

    I am in a situation now. I have submitted an offer on a multi-family based on FHA loan. I am the only offer the Seller received (up to now that I know). I have increased my price once responding to Seller's counter offer. However the Seller is not willing to accept my offer. I have waived inspection contingency. What else can I change to persuade the Seller to accept? I can increase the price another $25k but I am only going to do so if I am sure the Seller will accept FHA. Any ideas or suggestions?

     If they spent/wasted more than 10 days with this back and forth, it might be a good time to remind the seller that by now they could be past the inspection period and be a day or two away from having the appraisal back. So, do they want to waste another 10 days, or get things moving?

    1Reply
  • Matt N.
    OP
    Investor · Washington, DC · Member since 2016 · 51 posts · 14 votes
    9y

    @Chris Mason Good trigger. 

    0Reply
  • Joseph Hennis
    Fairfield, CA · Member since 2017 · 98 posts · 84 votes
    9y

    This is some myth that agents tend to have stuck in their heads right now. It used to be VA were the strictest, then FHA, then conventional. But current FHA appraisals are no different than a conventional loan. I can not tell the difference between the two. They both can come back with conditions and do so at the same frequency.

    That said, agents still have this stuck in their heads from years past and will advise clients to take a conventional loan over an FHA even though it makes little difference.

    There is one area where there might be some difference, and that is time to close. Cash is fastest, then conventional, then FHA and VA. But, I have had FHA's close faster than cash deals... Really just depends on the deal.

    Now that bit about the 203k... Seems unlikely... That's for a fixer, and is a bear of a loan type to work with. I can't see that being ahead of an FHA for any reason...

    1Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    9y

    @Joseph Hennis

    @Joseph Hennis,

    I think it stems ultimately from the 2005-2007 era (I wasn't doing mortgages then, but I hear things). 

    Conventional, the old timers could/would basically just solve any problem with fraud. Here are some crayons and a blank piece of paper, great let's call it a "paystub" and go home for the day!

    FHA, not so much. Homie don't play that (& didn't) with FHA.

    Now, in 2017, the crayons aren't cutting it either way. But reputations stick.

    0Reply
  • Matt N.
    OP
    Investor · Washington, DC · Member since 2016 · 51 posts · 14 votes
    9y
    Joseph Hennis Thanks. How can I get the seller's agent and ultimately the seller to comprehend this? Is their any document I can refer them to that shows or explains this?
    0Reply
  • Joseph Hennis
    Fairfield, CA · Member since 2017 · 98 posts · 84 votes
    9y

    Nope. You can't. We had appraisers come in to our real estate office and explain this to the whole office, that things have changed... Only to have the old school RE agents just disregard any of said advice, and continue to advise their clients to prefer the conventional loan over an FHA.

    1Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    9y
    Originally posted by @Joseph Hennis:

    Nope. You can't. We had appraisers come in to our real estate office and explain this to the whole office, that things have changed... Only to have the old school RE agents just disregard any of said advice, and continue to advise their clients to prefer the conventional loan over an FHA.

     Important thing to remember:

    If someone has been doing a job for 20 years, but has been doing all of the exact same things for years two through 20, then they do not have 20 years of experience. 

    They have two years of experience. Period.

    0Reply
  • Rodney Sums
    Laveen, AZ · Member since 2016 · 584 posts · 528 votes
    9y

    @Matt N.

    Is there something extra spectacular about this property that you're willing to not only offer more money but take the risk of having no inspection contingency?  I understand it's a seller's market across the country in many places, particularly yours....but if you can afford to put 15% down on 400k to 600k why not shop with someone else and possibly somewhere else

    1Reply
  • Matt N.
    OP
    Investor · Washington, DC · Member since 2016 · 51 posts · 14 votes
    9y
    Its in a developing neighborhood so I'm expecting a good appreciation in 5 years. It has an unfinished basement which means opportunity for fixing and renting it out for income and will add value to the property. The units are also under rent and occupied.
    0Reply
  • Rodney Sums
    Laveen, AZ · Member since 2016 · 584 posts · 528 votes
    9y

    Keep us updated

    0Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    9y
    Originally posted by @Matt N.:

    Its in a developing neighborhood so I'm expecting a good appreciation in 5 years. It has an unfinished basement which means opportunity for fixing and renting it out for income and will add value to the property. The units are also under rent and occupied.

     Are the rents under market because the tenants are under rent control? If that is the case, even if you buy it and are exempt from rent control...those tenants are grandfathered in, and they will never move.

    Regarding the basement...is 70% of the ceiling 7 feet or higher and does it have 2 means of egress in order to qualify for the basement apartment rules.

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  • Matt N.
    OP
    Investor · Washington, DC · Member since 2016 · 51 posts · 14 votes
    9y
    Russell Brazil The ceiling is incredible detail. I'll check that. Is it a requirement of Section 8 or HUD? It would be a great help if u could explain or direct me to information on rent control? I don't know when it becomes applicable and how it's applied.
    0Reply
  • Matt N.
    OP
    Investor · Washington, DC · Member since 2016 · 51 posts · 14 votes
    9y

    Hi All,

    I have good news. I successfully bought my first multi-family unit with FHA loan in DC. Hooray. I'm happy for myself. It was a challenge and the fact that I got through it successfully is what makes me happy. What made me win was that I offered higher EMD, increased the price by $10k but also asked the Seller for $10k contribution in closing costs.

    The property used to be 4 units but is now a 2 unit with four bedrooms each. 1st floor unit was rented out recently so the rent is not significantly lower than market. There were some last minute running arounds to get the TOPA but it ended ok. 

    I have painted and changed the carpet of the top floor and its ready for a tenant. 

    My installment is $2,900 per month. My income from rent of two units would be $4,400 per month. If I put aside $440 for maintenance and $440 for unforeseen costs I will have a net cashflow of $720 which I think is not bad. 

    I think few big units is better than many small units: 

    1. Because families tend to rent big units so it makes them less risky compared to single adults that may ruin and not take good care of their living space

    2. Family's tend to stay longer so less risk of losing a tenant and low refreshing costs. 

    3. Family's tend to cooperate more than individuals

    4. You reach rent control ceiling later than when you have more units

    I'm now interested in another multi-family with 2 units of four bedrooms in the DC area. Any recommendations?

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