I'm involved in my first flip --I purchased it on May 4th and finished re-habbing a couple of weeks ago. Having received a pre-approved offer at nearly list price (FHA), I was informed by the buyer's realtor that the offer would have to be retracted since I had not owned the property for 90 days yet. Can someone explain how this works, if there is any strategy or work-around? Is renting it for the next six weeks to this FHA buyer and having him purchase it after the 90 wait period a viable strategy? This first flip has been nothing but aggravation from the start with my former listing agent (now I'm licensed and listing it) giving me bad info, to my contractor taking twice as long to complete the job to THIS. I have a hard money loan out on this property at 13% and don't know whether to drop the price to pull-in a bigger pool of buyers and hopefully sell it sooner---thus paying off my loan sooner. Or whether I should be patient (its only been on the market for 2 1/2 weeks), leave the price alone. Very frustrating and depressed. Any advice or words of encouragement would be greatly appreciated.
I bought it as a foreclosure from a wholesaler for $83K----put $10K into it for rehab and asking $119,900 (arguably a rich number...but not so rich that it prevented me from getting offer in two weeks)---if I didn't have to deal with this FHA non-sense. Main question is if its logical to try and lease it to the buyer for 6 weeks (until the 90 day FHA requirement passes) and proceed as before.
What kind of effects? Wouldn't that bring in new buyers? My holding costs are about $1000 a month, and if I have priced too high, what are my alternatives?
I'm most interested in knowing whether renting it to the buyer until the FHA period expires is a viable option?
Realize that a preapproval does Not mean the buyer Will actually be approved. You won't know that until they do a full application and underwriting process. I wouldn't rent to them in the mean time, just keep it on the market.
First, check out the comps to make sure it is listed properly.
Next, this FHA business. FHA requires the title to be seasoned, and you cannot sell it to an FHA buyer before those 90 days are up. In your listing, do you have the option of what kind of financing you will accept? Just say no FHA for the first 90 days. There is no way around the FHA seasoning. BUT not all buyers are FHA buyers. You could still, potentially, get an offer from a non-FHA buyer.
I'm not a fan of renting to a buyer before closing. What if they turn around and say "Fix this or that or we won't close." Then you have to go through an eviction process, or fix this or that. They may ask you to take money off the price and they will take care of it. You don't want them in the house before closing. That is my take on that.
And lastly, let's talk about that contractor. They will never finish when they say they will. Ever. Sorry for such a downer bit of news, but best to know that now for future deals.
Try to switch your FHA buyer to your mortgage broker. if you do not have a mortgage broker on your team, get one. they come in handy for just this purpose, when you have an FHA buyer. they probably went through FHA because FHA only requires 3% down. Try to get them screened through a mortgage specialist and flip them to conventional financing that may only require 5% down, and if they don't have the extra 1 1/2%, work with them. It may seem like your giving a little away, but think of all the hard money and holding costs you can save by getting the deal done in half the time it would take to go through FHA. Just my 2 cents. Good luck!
As others have said:
- Get your own mortgage broker and encourage your buyers to use him.
- Steer your buyers away from FHA loans. That said, I wouldn't put in the listing "No FHA buyers," as this will lead some agents to believe that it's the condition of the house that is preventing an FHA loan, not the seasoning.
- I wouldn't rent back a flip prior to sale. There's always a reasonable chance a sale won't go through, and if you have a renter in there, you'll face two challenges: 1) it may be difficult to get them to leave without legal action; and 2) they may do damage that you'll have to repair at an expense greater than the rent collected.
- @Mindy Jensen and @J Scott
That's a really good point, those are great points that it could end up costing more that you'd make in rent. Definitely some great advice.
I definitely am aware of the rule - last year you could have 2 appraisals and the 90 day flip rule didn't matter. But 2015 is different - there's many ways you could go about this.
Each house and area is different. If you know that 90% of the people that will apply for this house in this certain area is going to be FHA you just hold your house until close to the flip date. (That is if you know its going to sell fast). If you have a house in an area where 50/50 could be conventional or FHA- id list it and just tell them cannot accept FHA loans. But what you could do is tell them about the new conventional loan that they brought back this year which is 3% down payment with conventional loan. This is less than the FHA 3.5% so Id tell them to maybe go try and apply for this loan.
just some ideas ive learned along the way
and I would never rent to a future buyer with the stories I have heard.
From your numbers, you flipped this house in less than a month and it looks like you are still somewhere between 15 - 25K in the black, depending on your carrying costs to this point. Unless I'm missing something, this seems like it can still be a great first flip. Congrats!
Could you pay off your loan with a HELOC (or some other source) and reduce your carrying costs in case you have to hold this longer?
At 120k ARV, would your house make a decent rental? I think you are a long way from having to do that, but it is still a strategy you could go to if the house doesn't sell. You might even be able to get some of your money back out on the refinance. You have options. Way too soon to be discouraged.
Hello my name L'Oreal and I do remember reading about FHA investments in the and did to be careful with FHA bc they stipulations such as the 90 day own rule. I'm new real estate myself and looking to network in area, what of Tx are you in? I'm Dallas about 15 minutes from downtown. I'm interested in with someone on a flip. Your numbers look really good by the way!
A couple of thoughts:
- If you say the number is a bit "rich", how confident are you it will appraise for that number? This could throw another wrench in the works during your buyer's underwriting process
- As suggested above, do you have any option to refi the property yourself? Conventional/portfolio/etc ? You can kick off the process now while still looking for another non-FHA buyer. Best case, you sell while dealing with the refi paperwork. If not, then at least you are down to a 4.5% or even a 6% rate and not bleeding money quite so fast
Good luck and let us know how it turns out!
Thank you, everyone. You've all made excellent points. @Bill, if I can get this guy to get the 3% conventional loan that Ali mentioned, I could sell it to the guy for $119K---only $900 off my list with only about 3 months of holding costs (would have been less if my contractor didn't take TWICE as long as he promised.) After Buyer's Agent fees, I would make a little over $15K. However, my holding costs are about $1k a month---AND this FHA rule has blocked me from selling it to my largest pool of buyers---FHA for another 6 weeks. At $1K a month holding costs, not sure if its smarter to drop the price for a faster sale (hopefully reducing the $1k a month holding costs), or whether I should leave the price alone and keep paying the holding costs. Unfortunately, most of the buyers in this area will be FHA, or they will want to rent. I purposely have not requested reimbursement form my hard money lender on the $9K in rehab that I put on my credit card (since I have 0% interest on my card---compared to 13% interest with the hard money lender. While I am saving roughly $100 a month in additional interest, the $9 k on my credit report, despite all of my bills being paid on time, has brought down my credit score dramatically---making it more difficult to qualify for a refinance. @L'Oreal---I am located in Frisco, but my subject property is near Grand Prairie and Cedar Hill in SW DFW. If you have any potential conventional or cash buyers in that area (or know someone who does), I have budgeted 3% for a buyer's agent commission (which can easily be converted to a "referral fee" to you, if you are not a licensed agent.)
A few things...
- Some contractors do finish on time. Those that write fixed price bids generally do and are my personal preference to deal with. The others, I always right in penalties for going over contingency on Schedule or Budget, unless the overage is due to an approved Change Order.
- You should always have at least 2 identified exit strategies for every deal. In this case, you've got the property cheap enough that it should cash flow or at least break even. Your secondary exit on this one would be to REFI into a conventional loan and rent it for 6-months to a year. A tertiary exit might be to sell it as a turnkey to a Buy & Hold investor, depending on where market rents are in the area of the property, turnkey's may go slightly above market.
- Evictions are pretty simple in Texas, so don't let the folks from other states scare you off from renting to the potential buyers. You can always do a lease with a Right of First Refusal clause, which allows them to purchase the property, but it doesn't get you into the Lease to Own issues. The lease can be self-limiting with a timeframe for acting on the Right of First Refusal. This would still require you to REFI.
Great post! Congrats @John Baskin -15k isn't to shabby on a first deal. Thanks for sharing.
Does anyone know as to whether a house cannot 'CLOSE" until after the 90 day seasoning is up, or whether a Purchase and Sale agreement cannot even be signed before the 90s is up. I am going to be made an offer tomorrow by an FHA buyer and I still have 22 days left until my 90 days expires. What can/should I do to keep this buyer interested and when is the earliest I could at least sign the contract and let her arrange for FHA appraisal.....and then actually close after the 90 days? In simpler terms, do I have to wait the full 90 days before I can accept the offer and before she can begin the process---or does it only mean she cannot close on the property until the end of the FHA seasoning? Please help...
Originally posted by @John Baskin :
Does anyone know as to whether a house cannot 'CLOSE" until after the 90 day seasoning is up, or whether a Purchase and Sale agreement cannot even be signed before the 90s is up. ...
In simpler terms, do I have to wait the full 90 days before I can accept the offer and before she can begin the process---or does it only mean she cannot close on the property until the end of the FHA seasoning? Please help...
Wayne Brooks explains at this link, and somebody posted the governing doc later:
But he states that the FHA contract cannot happen until 90 days have passed ...
The 90 Days is measured from purchasing closing date to the day it goes under contract to sell. I agree with not renting.. at least not yet.
I just sold a house via FHA- it was under contract 4 times in 3 months before a buyer finally made it through the process. All I can say is if you are selling to an FHA buyer pool, IMO you have to be patient (appraisals and ridiculous inspections) and have the cash to carry the property about 30 days longer than conventional buyer pool.
Hang in there it will work out!
What I would do is sit down with the buyer and accept their offer. However, I would simply tell them about the FHA policy you are dealing with and request you do a 30 to 45 day closing. Tell them they should wait before they go to their lender so the 90 day period expires but if everything is good they house will be there. I assume they are already pre-qualified then there should be no problems and if they are not pre-qualified then tell them to go get pre-qualified but assure them that if they do get pre-qualified the house will be their's.
Join the Largest Real Estate Investing Community
Basic membership is free, forever.