Why do banks dislike flipping?

Question

I understand not all banks dislike flipping, but most of them won't work with a wholesaling deal (hence the reason we need private buyer's lists). Anyone know what they dislike about the practice or how it harms them?

Eric M. · Answer

In general, the incidence of fraud goes up greatly when property changes hands rapidly.

Brian Burke · Answer

Gary, your question is a little ambiguous, as you can see from the variety of responses.  I'll take a different guess as to the meaning of your question.  Are you asking why you are having trouble doing a wholesale deal on an REO or short sale because the bank-seller or short sale-ing lender won't allow your contract assignment?

They don't like these deals because if there is a buyer willing to pay a higher price than their contract price, they want that money, they don't want you to have it.  Since you have not done anything to add to the value of the house, they assume that you have done something shady to get them to sell for less than the property is actually worth.  Their chief evidence is that there is another willing buyer ready to pay a higher price for the property.

Don't shoot the messenger, I'm just speculating on what is going through their head, not saying I agree with it.  If I misunderstood your original question, please ignore me!

Bill Gulley · Answer

Eric is more correct, IMO. Why don't you consider what most flipper here are doing, some add very little value and simply find someone willing to pay more, artificial value based on the knowledge of a buyer.

If a bank is doing construction financing, there is really no issue with the profit side for the bank, it's the risks. Are you a contractor who has done work for 10 15 years in the area or is this your 3rd deal?

More due dilligence is required by the bank, especially if you have a short history in RE. There are so many sacmmers out there some banks have just cut off such deals, so these whiz bangs who some think are so sharp have actually made it tougher on everyone else.

Think about that when you think of some scheme for quick profits. :)

Tim Delp · Answer

Not sure if you are talking about banks financing a property that has been recently acquired for a long term owner or if you are talking about a bank financing the property upfront for the flipper that is only going to own the property for 6 to 12 months?

If it is the finance to the long term owner the banks are always a little scared of the price of a property escalating that fast even when repairs can be documented and a distress sale can be documented.  Banks are always concerned with inflated appraisals.  A lot of this went on in the escalating market in the past where fraudulent appraisals and inflated values sold to straw buyers left the bank holding the home with less value than their note.

If it is the other it is really a matter of it is a lot of man power to do the due diligence on a deal to only have that loan on their books for 6 to 12 months.  Paying underwriters, processors and such to earn interest for 6 to 12 months even if it is a nice interest rate doesn't leave a lot of profit for the bank especially for the inherit risk as not all of these deals work out and the small profit margin in the banks eyes the majority that work out can quickly erode with 1 bad deal they take back at foreclosure

Dan R. · Answer

The risk is high and the reward is low.

Chris Martin · Answer

I can think of several of the top of my head: Too much risk compared to Owner Occupied, Banks don't hold the note and they can't underwrite flips with the GSEs, very small niche that isn't worth pursuing for a bank

Michael B. · Answer

Because flippers are risky, and bankers hate risk.

Unlike on TV, rehab projects can go bad. The investor runs out of money or more likely didn't know what he was doing in the first place. Costs get out of control and the investor loses interest and walks away from the house and loan.

Banks are all about risk. They perceive flipping deals as riskier than owner occupied deals, and therefore are less likely to want to be involved.

Will Browm · Answer

A crap load of work and and only a couple of payments to collect interest before you flip it...  Just my guess.

Why do banks dislike flipping?

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