Category — Investment Property

There is a new, old bad word among lenders now and that is property flipping concerning seller seasoning. The current lending crisis has led to seller seasoning becoming more of an issue among buyers, lenders, investors and brokers. Seller Seasoning refers to the length of time a seller has owned a property or been on title of the property. Property flipping is when an investor buys a property and turns around and immediately sells it. Immediately, by lenders definition is within 12 months.

There are 4 types of lending entities, each with their own flipping guideline.

•    FHA (Federal Housing Authority)
•    Conforming (Fannie and Freddie)
•    VA (Veterans Administration)
•    Hard Money (Kinda like getting a loan from Shady Frank but not to be confused with Barney Frank, although close.)

Now HUD defined property flipping with the original letter as “the practice whereby a property recently acquired is resold for a considerable profit with an artificially inflated value, often abetted by a lender’s collusion with the appraiser.”

In 2006 HUD loosened FHA’s flipping policy to 2 versions, 90 days and less and a 91 – 360 days.
According to FHA guidelines, FHA will only insure a loan on a property sold within 90 days if the seller is HUD, a Government Agency, a Federally Chartered Bank, a Non Profit or a relocation company.  AFTER 90 days to 6 months, FHA will require a 2nd appraisal if the purchase price is 100% above the sellers purchase price and also, this appraisal cost can not be paid by the borrower.

Additionally, up to 12 months, FHA can require additional documentation to “support the resale value if the resale price is 5 percent or greater than the lowest sales price of the property.”

*For more information see FHA MORTGAGEE LETTER 2006 -14

Conforming (Fannie and Freddie) has no seller seasoning requirement

VA (Veterans Administration) has no seller seasoning requirement

Fannie, Freddie and VA have no “seller seasoning” requirements, although each lender I can assure you does. Most lenders are 12 months, some are 6 months and at the very least 1 or 2 will be 90 days. This is called Risk Overlaying.

Risk Overlays … Lenders may impose additional conditions to further insulate themselves from the possibility that they may have to buy back the loan. Risk overlaying not only applies to seller seasoning but every other loan underwriting guideline as well. As a Buyer, seller, Realtor you have to be very careful….just because there is a DU approval DOES NOT MEAN the lender will fund the loan. I can not stress this enough. The biggest overlays right now are credit scores and debt ratio’s but there are many more. Buyer beware.

Do your due diligence find out prior to submitting an offer how long the seller has been on title. If its less than 90 days save yourself the trouble unless of course it qualifies for the FHA exception. If you don’t, your lender will not find out till the appraisal is done that the title has transferred and then your into the transaction for $350-$400 and a lot more in wasted time.

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With the current market real estate investors have to look at other “back to basics” ways to move investor properties. The three alternative options for investors below are not new but seem to be forgotten, great ways to rethink the marketing and selling of your properties and get your asking price and even more. First you can move your property very quickly. Second, you can name your selling price and most often it can be much higher than the general market will bear. Third, all of these strategies can actually increase your investment return exponentially more than just out right selling your property on the market.

Seller Held Seconds – This is a great option for those rehab investors to get their initial capital out of their property and move on to the next project and also opens the market to many more potential buyers. Let’s say you buy a property for $150,000 and spend $15,000 in renovations. Let’s say after renovations the property is worth $200,000.

The potential home buyer secures a conventional 1st deed loan at 80% of the value of the home and takes out a mortgage for $160,000. This pays your loan off and also you’re out of pocket expense renovating or updating the property. It’s essential, that there is a down payment from the buyer of at least 3% to 5 %. In this instance, you hold a second deed for $30,000.

You become the second deed of trust with all the rights of any 2nd trust deed holder. Most often the terms of the loan are higher rates and shorter balloon terms; let’s say a 36 month balloon (36 months is typically the shortest balloon term a first deed lender will accept) at 12% interest rate with an interest first payment option. So during the 36 months you’re receiving interest payments of 12% and by the end of 36 months the buyer needs to refinance the property to pay your loan off. [Read more →]

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There is a word that is used in investing that I think a lot of “real estate investors” had forgotten over the years. The word is eval·u·a·tion. Webster defines evaluation as:
1 : to determine or fix the value of
2 : to determine the significance, worth, or condition of usually by careful appraisal and study

The current market can make it more difficult to evaluate investment properties. The determined sale price at the beginning of renovations can be 5% or 10% less at the end of renovations. Not to mention you have to account for marketing expenses, carrying costs, tax implications and even have a Plan B.

Its very important that real estate investors align themselves with competent advisor’s that can advise them how to properly structure and progress the transaction. This includes a Certified Mortgage Planner, CPA, Realtor, Property Manager and Appraiser. There are many DIY’s “speculators” out there getting absolutely hosed and even foreclosed.

Its essential that you spend a large amount of time of due diligence when considering an investment property to purchase. Initially this may take some time to develop your specific goal but properly structuring a consistent standard upfront will save much time down the road and allow you to move quickly as investment opportunities arise. A very brief overview of considerations are below: [Read more →]

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It’s not a surprise to investors out there that properties are staying on the market for what seems like a lifetime, if they sell at all. The Census Bureau estimated that there are approximately 2.1 million vacant homes for sale nationwide, up over 7% from a year ago. The total number of vacant properties not for sale or rent is estimated an astounding 17.9 million units.

For many the one option may be to wait out the market downturn and rent out the properties until the inventory glut clears out. For those that have no history of renting properties be prepared for a whole new world. Mike Mulligan of Property Managers of Virginia states that “investing in real estate is serious business and a big investment. Knowing and keeping up with regulations, legal issues and liabilities in the State of Virginia can seem overwhelming.”

Its is true, there is a whole new world out there of fair housing requirements, landlord tenant laws that may vary from county to county, tenant screening, property maintenance and expense and pricing your property for rental. For those that are not prepared with professional help and professional advice can be set up for disaster.

Of course just by hiring a property manager does not mean that you will be trouble free. But it does mean that you can have a life outside of managing your properties.

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