You Sure You Want to Sell To An FHA Buyer?

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Chances are, if you are fixing and flipping properties on the retail market today, you have sold properties to FHA buyers.  Interestingly, almost 25% of all purchase loans last quarter were FHA loans. I know in my market, it seems like almost every offer I get on a retail project comes from a buyer attempting to obtain an FHA loan.   Just last week in fact, I had an offer come over from an FHA buyer and was reminded again how much I don’t like dealing with the FHA requirements imposed on me as a seller.

I remember a couple of years ago, when investors couldn’t even sell a property to an FHA borrower if the property had not been owned for at least 90 days.  Luckily, FHA came to their senses and agreed to stomach the notion that an investor actually could renovate a property and legitimately increase its value.  While this was definitely a step in the right direction, FHA still places a heavy burden on a seller attempting to sell a property to an FHA borrower.

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FHA Guidelines and the Second Appraisal

I was reminded of this when the selling agent called us up a few days after execution of our purchase and sale agreement to inform us that the lender was going to require 2 appraisals and that we would have to pay for one of them.  That’s right, FHA guidelines stipulate that if the seller has owned the property for less than 90 days AND is making a “profit” of more than 20%, two appraisals will be required and the borrower can only pay for one of them.  (I put the word “profit” in quotations because FHA simply looks at the original purchase price compared to the new selling price. We all know that with renovations, closing costs, holding costs, etc. – this is definitely not all “profit”) But the bottom line is you as the seller are almost always going to get stuck paying for this second appraisal.

This may not seem like a big deal  – just a few hundred bucks in concessions to help get the deal closed. That may be true, but I see this appraisal cost as a huge gamble.  I’ve had too many FHA loans not close and too many appraisals come in low to put that money out there for a buyer I don’t know anything about.

As an aside, I personally like to try to push this expenditure out as close to the closing as I can.  As was the case with this last deal, I negotiated that we would only pay for this second appraisal after the first one had been completed (and came in at value) and the buyers were outside of their financing contingency.  I’ve also heard of investors negotiating with the loan officer to pay for the second appraisal out of pocket with an agreement to get reimbursed by the seller at the closing table. This way, you at least know the deal is getting closed before shelling out the cash.

FHA Is Going to Tell you What To Fix and Make You Pay For It

The other guideline that sellers need to be aware of when working with an FHA buyer is the inspection and subsequent repairs.  In a conventional deal,  buyers and sellers typically negotiate which repairs will be completed and which ones will not. In an FHA transaction, the underwriter determines what repairs need to be made (based on a mandatory inspection) and the borrower is not allowed to pay for any of these repairs. That’s right, the seller is once again on the hook for costs that could arguably have been passed on to the buyers.

I don’t know about you, but there is something about these impositions on me as a seller that just rub me the wrong way.  Why should I as a seller have anything to do with somebody else’s financing?  Why should I be asked to spend speculative dollars on appraisals and repairs for somebody I don’t even know?

Regardless of my feelings about these FHA guidelilnes, the fact is that a quarter of my potential buyers are going to fall under these rules and I need to be prepared.  As investors, it’s important that we understand the system that we operate in and learn how to navigate these types of challenges.

About Author

Ken Corsini

Ken Corsini G+ is the host of the Deal Farm Podcast (on iTunes) and has 10 years of full-time real estate investing experience. His company, Georgia Residential Partners buys and sells an average of 100 deals per year and has helped hundreds of investors around the country make great investments in the Atlanta market.

Ken has a business degree from the University of Georgia and a Master Degree in Building Construction from Georgia Tech. He currently resides in Woodstock, Georgia with his wife and 3 children.


  1. Thanks Ken, How might a seller add an addendum to the buyers offer that states that the buyer will accept a 2nd for any difference between the asking price and what low ball appraised (loaned on the 1st amount)? I’ve heard that some lenders won’t allow a buyer to take on a 2nd at the closing table, maybe that was in commercial?

    As sellers we need a tool kit of what works in this scenario?

    Personally I recommend buyers to a a list of small local banks who buy for portfolio.


    • Hey Curt – I’m with you – I definitely like to think outside of the box and it’s important to have a toolkit of strategies to do this. However, Curt is right, FHA definitely isn’t going to go for a 2nd loan.

      But like you said – having an aggressive local lender is definitely not a bad idea as a backup.

  2. FHA won’t allow a 2nd to be put in place at the closing table. If the aprraisal comes in low that value has to be used for the buyers loan. If the purchase price is higher than the appraisal then the buyer has to bring cash to the table or the price has to be lowered. That appraisal sticks with the property for at least 120 days before a new FHA appraisal can be ordered.

    Even conventional loans have gotten much more stict on conditions and repairs needed. Most of the banks will be selling their loans to investors who basically use the same guidelines for FHA as they do for conventional. Just because it’s a conventional loan does not mean you won’t run into the same issues.

    We have run into the second appraisal a bunch lately, but luckily values have come in okay. We always rehab our properties and very rarely run into anything serious as far as appraisal requirements for repairs.

    • Hey Mark – thanks for the post. Glad to hear you haven’t had issues with your appraisals.

      Also – you bring up another good point about the appraisal sticking with the property for 120 days. Unlike a conventional loan, the buyer can’t up and change lenders in hopes of getting a better appraisal.

      • I wouldn’t say we have had no issues. We have had to get multiple appraisals on properties, but luckily most of them have both come in at contract price(until now!). We have alos had to provide a list of repairs to justify the price increase and wait the 90 days for most lenders.

        I am also a HUD listing broker and those FHA appraisals can be nuts! HUD will allow FHA financing with a repair escrow if repairs are under $5,000. The appraiser determines the repair amount. I had one in great shape, except for a few minor cosmetic issues. The appraiser said it had more than $5k in repairs. $2,000 to replace a garage door on 2 car garage. The door had a golf ball size hole on the outside of one panel, the hole didn’t even go all the way through. $2,000 to repair plumbing. HUD only does pressure test and does not determine damage, they usually escrow $500 for this. $1,500 to repaint exterior. There was no chipping or fading paint anywhere. In fact it looked like it had been painted in last two years. $1,500 to repair siding. There was a small indent about 6 inches by 6 inches in one piece of siding.

        Okay, sorry for the rant.

  3. Having been on the buyer end of an FHA deal in the past, using an FHA loan for purchase, my approach was to educate myself on what would be a red flag for the appraiser beforehand, and build those inspections and repairs into my offer as contingencies. For example: I knew the electrical would need to be fully inspected with some repairs, so I added an electrical inspection contingency. This way I was paying for the work, getting it done ahead of time and rolling the repairs into the loan at closing.

    There is a risk involved on the part of the buyer using this technique if the sale doesn’t go through, but that wasn’t a concern in this case.

    Perhaps by providing buyers with some materials to educate them early on in the process, extra costs and delays can be avoided.

    • Page – thanks for the comments. You must have been a sellers dream! I wish I had FHA buyers that were willing to make repairs before the purchase!

      But you make a great point that educating your buyers on the front end can be very beneficial!

      • Yes, I’ll admit the approach was unconventional. The property was not on the market and I knew what a deal it was, so I was willing to think outside the box.

        Since the goal is to make everyone happy, going that extra mile to educate the buyer can really pay off.

  4. I work mostly as a buyer’s agent, and I’ve seen a significant increase in FHA loans in my Charleston, SC market over the past year. When I started in the business in the early 2000’s, FHA loans were somewhat obscure, but now it’s simply one of the best financing options – especially for first-time home buyers. With financing standards getting tighter and tighter, it could be a lot worse! At least we’re getting a steady stream of qualified and eager buyers, even if it means a little more work.

    • Lee – you are right – FHA has definitely taken the place of the subprime loan in recent years. And you make a good point … even if it’s more trouble to work with FHA from a selling standpoint, at least it puts more buyers in the marketplace!

  5. Melissa Johnson on

    Good article! Danny and I were just talking about this last night. Almost every deal we have closed in the past 2 years has been FHA. We’ve had these same issues. A big issue that has come up in the last 2 deals we’ve retailed is the fact that we were just short of 90 days on holding the property. Meaning we signed the contract 2 days before having owned for 90 days. Ugh! Even though FHA has waived the 90 day rule, we are finding that the banks have the option of continuing the enforce it by asking for the 2nd appraisal (which is actually very vaguely worded when you read the FHA Flipping Rule). When you combine that with the whole 20% “profit” nonsense it’s really been a nightmare. They are asking for original HUDs, as well as a list of all repairs that were made to the property to justify the increase in value. So if anyone is thinking of selling FHA, make sure to check your acquisition date before signing the contract…it may be an issue!

  6. We just had a conventional appraisal from a portfilio lender come in 10k below contract price! The property was under contract in 10 days with an investor and there are 3 other similar properties under contract for more than ours is. The appraiser claims there were not enough sold comps to justify the price.

  7. I know it runs contrary to flipping process, but when issues of title seasoning like this come up, I’m glad I rent and hold most properties I buy for at least a year (gets me favorable cap gains treatment too). I now it’s a challenge to tie up your cash for a year or more, but I’ve had some luck with selling on Lease Options, then closing the sale after a year or more of renting. I have occasionally had to concede a little on price if it didn’t appraise high enough (sometimes tenant-buyers make enough repairs so it does appraise high though, I like that!), but I’ve always made a good return using this model.

  8. Low ball appraisals aren’t just a problem for the seller. Put yourself in the buyers’ shoes. They are probably going FHA because they don’t have the 20%. If an appraiser low balls by $10-20k or more (and it HAS happened), that means the buyer has the choice to bring the difference (which is unlikely due to the need for the FHA loan in the first place), renegotiate, or walk away. They’ve probably already put up a decent sum “in good faith” that they lose if they walk away as well. Many times, the buyer was perfectly ok with the first appraisal and is just as angry as the seller with the low ball appraisal. This is a no-win situation for either party.

    • FHA rates are so low! only a moron would go conventional. I make a real nice income and i still went FHA i wanted the lower fixed rate. It really is a no brainer

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