Bulls & Blogs

Property Flips Made Easier

Investment, Regulations, Residential Mortgage Comments Off

Feb 112011

You probably are aware that last week FHA extended its waiver of the property flip rule, eliminating the “seasoning” requirement for sellers. You may not be aware that some lenders also have reduced the seasoning period for conventional loans to as little as 30 days.

As we said before, this is a huge deal for property investors because it means they can purchase a foreclosure at auction and almost immediately market the property for sale at an elevated price.

The FHA property flip rule prohibited the use of FHA financing for properties that had been owned for less than 90 days. The FHA announcement last week extended the waiver through the end of 2011. Most lenders now are applying the FHA waiver as intended, meaning the waiver applies even to properties for sale by individuals and corporations.

For conventional loans, the seller must be on title for 30 days prior to signing the contract for sale. The rule applies to all sellers, including individuals or corporations.

Loans for Homes Needing Repairs

Investment, Loan Guidelines, Loan Programs, Owner-occupied, Residential Mortgage Comments Off

Oct 142010

Have you ever tried to get a loan for a fixer-upper? Most lenders won’t approve loans to purchase homes that need major renovation. What about getting a loan to remodel your existing home or rental property? You could try a home improvement loan, but second lien interest rates can make that option unattractive, and second lien lenders will not touch investment properties.

The solution may be the Fannie Mae Homestyle Renovation program. The program allows you to combine the purchase or refinance of a home with the costs to renovate or extensively remodel the property. Soft costs, such as architectural services and engineering and permit fees, may be included in the loan.

This is a conventional loan program with conventional interest rates. Rates are about 1/2% higher than standard conventional rates.

For your primary residence, you may borrow up to 95% of the property value. For a home purchase, the property value is the lesser of the “as-completed” appraised value and the sum of the purchase price and total renovation costs. For a refinance, replace the purchase price with the payoff of your existing liens. You may borrow up to 80% for a second home and up to 75% for a rental property.

Total renovation costs included in the loan, including any contingency reserve, eligible soft costs, and payment reserve, cannot exceed 50% of the estimated “as-completed” value of the home. Soft costs are limited to 3% of loan amount or $5,000. A payment reserve is allowed only if the home will be uninhabitable during renovation.

The program can be attractive for remodeling an existing home even if you’re satisfied with your current mortgage. Interest rates are historically low, and it’s unlikely you can find a home improvement loan that will result in a lower combined payment than the payment from refinancing using the Homestyle Renovation program. (Use our “Compare Options” calculator on our Web site to check the numbers yourself.)

The program does have one significant restriction. A licensed contractor must perform the work. You cannot use a renovation loan to do your own remodeling. If you want to do it yourself, you need to consider a home improvement loan or a Texas equity (cash-out refinance) loan. Renovation must be completed in 6 months, and you cannot use the program to complete a previously started renovation project.

HUD Makes It Easier to Buy Property Flips

Investment, Loan Programs, Regulations, Residential Mortgage Comments Off

May 272010

Property flipping, through which a real estate investor buys and resells a property in a short period of time, is a popular way to achieve elevated returns on investment properties. Unfortunately, it also was a preferred means of committing fraud in the lead up to the financial meltdown. (Fraudsters often would conspire with appraisers who would inflate a property’s value, thus enabling the fraud.)

As a result, HUD prohibited the use of the FHA loan program for properties that had been owned for less than 90 days. The FHA loan is a favorite of first-time homebuyers because of its lenient down payment and lower credit score requirements, and a large share of property flips are lower-priced homes, which tend to attract these same homebuyers. The result of the prohibition was that investors often had to hold properties for 90 days before they could sell for no reason other than to satisfy the regulation. This made the economics of purchasing distressed and foreclosed properties much less appealing.

With the number of foreclosures rising dramatically, HUD on Feb 1st waived this regulation under certain conditions. This is a huge deal for property investors because it means they can purchase a foreclosure at auction and immediately market the property for sale at an elevated price. There’s only one problem: Most lenders are not applying the waiver to sales by private individuals. I did say most, not all. I know of at least one lender that is applying the waiver as HUD intended.

Check your excitement until you review the conditions. (This is only a summary. Drop me an email if you want the full text.)

– The seller must hold title to the property, so contract assignments may not pass muster.

– It must be an arms-length transaction with no identity of interest. The property should be marketed “openly and fairly.”

– The property’s title report cannot show a pattern of flipping.

– If the sales price of the property is 20% or more higher than the seller’s acquisition cost, the waiver will apply only if:

– A second appraisal verifies that the seller has completed repairs to increase the property value or explains why the increased value is justified absent repairs;

– A thorough property inspection, performed by an independent inspector, must be provided to the buyer.

(Actually, the waiver allows the lender to justify the increased value without a second appraisal, but I don’t know any lenders willing to do that.)

Getting the waiver will add some time to the loan process. Additionally, the lender cannot request a waiver until the first appraisal has been completed. Thus, the buyer may have to eat the appraisal cost if HUD rejects the waiver request.

If you want more information, or if you have a transaction you want me to review, don’t hesitate to drop me an email.

Loans for Properties Needing Repairs

Investment, Loan Programs, Owner-occupied, Residential Mortgage Comments Off

Mar 312010

If you’re house hunting, it’s quite possible you’re looking at “distressed properties.” These are properties that are in foreclosure or at risk of foreclosure (for example, the current owner is more than 30 days late on the mortgage). Nationally, distressed properties accounted for 35% of existing home sales in February. With roughly 15% of mortgages in default, it’s likely that distressed property sales will continue to be significant for months to come.

An advantage of looking at distressed properties is you may get a bargain. The current owner is under pressure to sell the property and may accept less than market value. A disadvantage is they sometimes need repairs. This can be a serious impediment to getting a loan. Lenders generally expect homes to be “move in” ready. (If you default, the lender doesn’t want to be stuck with a home it cannot sell.)

In distressed property situations, the seller may not have the funds to make the repairs or may need to sell the property quickly. If the property is in foreclosure, the bank is selling the property “as is.” The repairs are your responsibility. Of course, it doesn’t make sense for you to pay for repairs until you own the property. If something gets in the way of closing, the money you spent on repairs is gone. What you need is the ability to purchase the property with a contingency that the repairs will be made.

Say hello to the repair escrow program. This conventional mortgage program allows you to purchase a home and escrow for the repairs at closing. The program limits the repairs to the lesser of 15% of the property value or $15,000, and the necessary repairs must NOT affect the livability, soundness, or structural integrity of the property. (The lender determines whether the repairs are acceptable.)

For example, if the previous owner stained the walls and carpets or removed the stove, the lender probably would accept the repairs. Similarly, a poorly working A/C or heater probably would pass muster. However, if the previous owner removed the sinks and toilets, the lender probably would consider the property unlivable. Similarly, if the property has rotten flooring, the lender probably would consider the property unsafe and unlivable.

The program is available for primary residences, second homes, and investment properties. Manufactured homes are ineligible. The repair funds are escrowed by the lender and must equal 150% of the repair bid or contract. Either the buyer or seller can provide the funds. The repair cost must be determined by contractor or vendor bid or by a signed contract. The repairs must be completed in 60 days.

The program is not for all situations. Properties needing major renovations or that have been seriously vandalized may not fit. However, for situations of deferred maintenance or simple neglect, this may be just what you need to complete the purchase.

Residential Investment Property Financing Options in 2009

Investment, Loan Programs, Residential Mortgage Comments Off

Feb 032009

Getting a loan to purchase residential investment property has become more difficult. The discussion below summarizes some of the options that still remain.

Conventional financing – If you currently own fewer than 4 residential properties, conventional financing (Fannie Mae or Freddie Mac) is still available to you. However, maximum leverage is 80% (20% down), and you have to put at least 25% down to get a decent rate. While underwriting guidelines state you can qualify with a credit score of 620, you need at least 680 to get anything approaching a good rate. A score of 740 or above will get you a nominal rate of about 6.5% on a 30y fixed rate loan. Expect to pay a higher rate for duplexes, triplexes, and 4-plexes.

The 4-property limit makes it difficult to acquire multiple properties with conventional financing. (As an aside, I heard a rumor about a month ago that one or both of Fannie and Freddie are considering easing this restriction, but I have heard nothing to corroborate this rumor.) Thus, it is important to look at alternatives that are available in this tight credit market.

Local Banks – Local banks picked up some of slack in financing investment properties last year, but I’m hearing more and more from my banker friends that they have stopped. Many of the banks are scared to make real estate loans right now because of potentially falling home prices and increased foreclosures. I also understand regulators are putting pressure on them to stop lending on real estate, especially “speculative” real estate. If you can find a local bank willing to lend on investment property (when I say local, I’m suggesting smaller banks, banks with maybe only a couple branches – not the Bank of America down the street), count on no better than 75% loan-to-value and very strict underwriting rules. They will want to see liquidity – “cash in the bank” (not necessarily their banks). The idea is that these “reserves” will cover you if you’re unable to keep the property rented or you have unforeseen expenses.

Rehab and Hard Money Lenders – This is private money and generally expensive money. Expect to pay 3 to 8 points and 10% to 18% interest. These are short term loans. The lender expects you to flip or refinance the property in a short period of time, usually a year or less. That begs the question why would anyone use these lenders? Well, they specialize in helping investors pick up foreclosure properties, especially ones that require some rehab work. Most of these lenders will lend based on the ARV (after repair value) of the property, and many will lend up to 100% of the acquisition and rehab costs. Most restrict the loan-to-value to around 65% (maybe a little higher) of the ARV. So, if you agree to purchase a property for $50k, and the property needs $25k in rehab, you could conceivably purchase the property with little money out-of-pocket if the ARV was around $125k. (But, remember, the lender orders the appraisal.)

That all makes it sound easier than it is. Liquidity is a HUGE issue for rehab lenders. They generally want you to have money in the bank sufficient to cover at least half the rehab costs plus 3 to 6 months of interest payments plus the closing costs (points plus other fees). This is even if the ARV is sufficient to absorb these costs into the loan. They don’t want to foreclose on the property, so they want to make sure you have enough cash to cover everything, foreseen and unforeseen. Other personal financial factors are not as significant. A credit score of at least 640 will grant you consideration, but higher scores and higher incomes improve your chances.

One final comment on rehab and hard money lenders: In the last couple months, I have noticed several of them have stopped funding residential properties. I don’t know why, but I suspect it stems from concern about real estate prices.

Seller Financing – Sometimes, the property seller will agree to take a lien against the property rather than cash at closing. This is more likely if the seller currently has no lien against the property or if the seller is having a hard time selling the property. There are no rules for seller financing. The financing terms are whatever you and the seller negotiate into the contract.

I hear from my realtors friends that there are some real bargain properties out there. These are the financing options available to you. While they are quite restrictive, I have talked to many investors who are making them work to their advantage.

As a closing comment, I want to mention that some investors are choosing to move their 401k money into real estate. This requires a special lender with an appetite for this sort of thing. Fortunately, a few such lenders do exist. I will save the details for another blog.

Newer Entries