Financing a Flip?

15 Replies

Greetings!

I have my first rental under my belt, and am looking to flip the next one.

My question is, what is the best way to finance a flip? For instance, on my rental, I got a 30 year mortgage, and there is a prepayment penalty for the first 3 years. Additionally, I have heard about "seasoning" issues of loans.

Consequently, if I went the same route with a house I plan to flip, I wouldn't be able to sell it for 6 months....

Can someone lend some light on this issue? I have a feeling the traditional mortgage will not work in this instance.

Best regards,

Grant

For a true flip you will not "own" the property at all. You will want to arrange for a sales contract with the seller and then you resell the property to someone else before the contract closes.

For rehabs, you can try hard money / private lenders. Really you can use any loan that won't penalize you for prepayment.

Originally posted by "Grant":
So what's the lowdown on the "seasoning" of the loans?

I've heard that a buyer will have a tough time getting a loan if your own loan isn't "seasoned".

Grant


Not sure I understand this question but I will take a stab :D

The new buyer shouldn't have a problem if they are getting their own financing. Some banks, not all, have a no-flip policy on appraised value and will not finance a higher value if it was flipped twice. So your buyer would need to come in with extra down payment to cover the difference.

Seasoning of "loans" has to do with refinancing a previous cash-out loan that is less than 12-months old. The new loan will be treated as cash-out.

Also, the term seasoning is used with regard to down payment and reserve funds being in the possesion of the borrower for a minimum of usually 2-months.

Hope this helps.

To Your Success,

Tony Baricevic
Mortgage and Equity Consultant

Ah, I was under the impression the buyers lender would not approve a loan for a property if they saw that the property was recently purchased (within the last 6 months) and the owner turned around and sold it for a significant amount more.

In essence, I buy a property from a bank for $50,000 and turn around and put it on the market for $150,000. I haven't done $100,000 worth of work to the house, and a buyers lender will not like that...

So what I'm gathering from you is that this only applies to cash-out refi's?

Thanks for taking the time to respond to my question!

Regards,
Grant

If you are getting the property at below market value, the bank shouldn't have a problem with you selling for a profit based on the appraisal. It's the quick jump in values where they get shy. You buy it at close to market value sell it for a 25% profit in two months and that person goes to sell it for another 25% profit in three months. This makes some lenders nervous.

Care to share some of your successes, techniques, tips with us in this thread? :D

Tony Baricevic
Mortgage and Equity Consultant

I see, I think I understand now. They're really looking at the appraisal value, and not so much the sale/resale price. That makes sense.

Care to share some of your successes, techniques, tips with us in this thread?

Sure I can, but I must say that I obviously don't have much experience in the "creative financing" aspect of real estate, but I'm learning more and more by the minute (or post).

I acquired my first property on the last business day of last year. I financed it through a traditional 30-year mortgage with no money down (i.e. 100% financing). I then did the rehab myself, working nearly every day in January, including weekends to get the property ready to rent.

I use the term rehab fairly loosely in this case, because the rehab consisted of interior paint throughout, new carpet, fixing some plaster walls, new appliances, some minor DIY plumbing and electrical, and basica cleaning. So there was no knocking down walls and tearing up floors in this "rehab", but it was all stuff I could do myself.

I used my own cash to do the fix-ups, and I'm trying to find a way to keep from using my own cash in the future. I've read a lot about hard money lending, and that's intriguing, but I'm not sure that's the way I want to go... Still researching. One option may be to do the hard money lending to get the $$ for the rehab, and then refi when I get it rented.

So I'm still a newbie here, but I'm learning more and more every day.

I started my blog to keep a "diary" of my real estate ventures, as well as my other business doings, but I'll keep this site updated too, as I'm sure there is someone out there in my shoes.

Thanks for the responses!

Grant

I am a mortgage underwriter and can answer the seasoning questions. Most conventional lenders have no seasoning requirements any longer. Used to be 12 months. Having said that, what I look for when underwriting the appraisal is an explanation for the increase in price from the previous sale. All appraisers are required to disclose a 36 month sales history on the subject property. If I see a house was bought 6 months ago for $100,000 and is now selling and appraising at $150,000 I need to know why and to justify that increase in such a short time. If the appraiser addresses the issue, you will be fine.

For example, if you purchased the house and did a complete remodel, you could explain it that way. If you bought it as a distressed sale (owner in foreclosure etc.) and it was sold below market, it can be explained that way. Legitimate flips like these are never a problem for a traditional lenders. The more difficult ones are the homes you bought at market price and are trying to sell shortly thereafter at an inflated value. Those will rarely get approved.

You are all explaining the mortgage seasoning issue and I have a feeling that the original question concerned the ownership seasoning. Im a loan officer and deal witht hi quite often.
The lenders do not like to finance purchases when the seller hasnt owned the property for at least 5 months. So, yes, there is a seasoning requirement.
Hope this helps.

Originally posted by "Grant":
Greetings!

I have my first rental under my belt, and am looking to flip the next one.

My question is, what is the best way to finance a flip? For instance, on my rental, I got a 30 year mortgage, and there is a prepayment penalty for the first 3 years. Additionally, I have heard about "seasoning" issues of loans.

Consequently, if I went the same route with a house I plan to flip, I wouldn't be able to sell it for 6 months....

Can someone lend some light on this issue? I have a feeling the traditional mortgage will not work in this instance.

Best regards,

Grant

Grant,

I hope to bring this back on topic. My understanding is that you believe that you MUST hold the property for six months. This is FALSE, BUT....

Banks are in the business of lending money to make money. The most expensive part of the entire loan process is the origination. So with that said, you are quickly going to burn bridges with your favorite mortgage buy/gal. Make sure that they know what you are doing beforehand.

It is possible to finance properties for the flip and hold them less than six months.

Hope that helps!

Woods
www.LoansInAnyState.com

Also, not sure if you mean this, but conventional lenders have a huge problem with doing double closes because the end buyer is essentially closing on the contract with you, but you are never really in title as the seller. Is that more along the lines of what you are asking? Me thinks that might be what you mean by seasoning. Many people use that term sparingly, but juzamendi is right. There are flips where you are never really in title where the end buyer's conventional lender can see it and that's when they jump out of it saying you can't sell a house you don't own and very few, if any, will allow their funds to be used in a double closing. There are ways to get around this creatively, but if you know of a conventional lender that will do these, let me know please. Pleaseeeeeee.

Traditional lending is where seasoning becomes an issue. As stated earlier. Anytime there are two transaction on title in a one month time frame it makes the eye in the sky take a look. Now using private money which isnt governed by RESPA and has no seasoning issues is the easy way around this. Dual closing is something I would shy away from and being a lender I absolutly walk the other way. I have done several rehab loans that have turned in a matter of weeks with no problems.

I know american brokers condiut is a lender that will fund.. they are an A lender and seasoning does not matter. www.Abconduit.com they are a wholesale lender... hope this helps if the people are in florida i can do the loan.

ryan

From my experience some lenders will allow a purchase transaction with no seasoning of ownership (lets say 1 day). There are others who will not. I spoke with an ae today that said they would not allow it. So it depends on the lenders your using. Also, if you are planning to flip make sure you let your broker/banker know about this. Most lenders don't like to see deals flip within 6 months of transaction (as far as the loan being paid off). There are some who don't mind. You want to deal with a broker/banker who will go over those options with you and looks at the whole picture.

Best Regards,

Anthony Limon
CFIC Home Mortgage
[email protected]
www.lowermydebtnow.com

Does anybody know a wholesale lender that will finace a flip. I have a investor who buys properties, and then resells them to a buyer on the same day he closes. I need a lender that will do loans for the person buying it from an investor.[

quote="Grant"]Greetings!

I have my first rental under my belt, and am looking to flip the next one.

My question is, what is the best way to finance a flip? For instance, on my rental, I got a 30 year mortgage, and there is a prepayment penalty for the first 3 years. Additionally, I have heard about "seasoning" issues of loans.

Consequently, if I went the same route with a house I plan to flip, I wouldn't be able to sell it for 6 months....

Can someone lend some light on this issue? I have a feeling the traditional mortgage will not work in this instance.

Best regards,

Grant

hello,

here in Texas, you have to own the property for 90 days before you sell to an FHA buyer or 12 months for a conventionally financed buyer.

definitely weeds out alot of conventional buyers that have interest in my property.... sometimes it makes it scary but in a market like Austin, it's hard to lose!

I don't know if it matters from state to state but that's my experience with rehabbing here in Austin....