Maximizing Your Profit by Knowing Your Buyer’s Financing OptionsPosted on April 3, 2017 by
When making offers on properties as an Investor, you will need to have your exit strategies in place prior to purchasing the property. What I mean by that is, who is your buyer and what type of financing are you going to allow the buyer to use when you sell the property. Knowing this will allow you to maximum your profits.
When I look at properties to purchase I always analyze the value of the property and how long I will have to hold the property before I am able to sell the property for a profit. The comparables that I use are through Realtytrac.com and also the Multiple Listing Service. Realtytrac will give me the values in the area, however, the Multiple Listing Service “MLS” in addition to values will provide me with how the property was sold ie; Cash, Conventional mortgage, USDA mortgage, VA mortgage or FHA mortgage. You can normally assume houses under $200,000 that many of the buyers purchasing at this price point are FHA mortgage buyers. FHA mortgages are mainly used for first-time homebuyers. The Mortgage Lender requires 3.5% as a down payment which attracts many first-time homebuyers.
What I have found in the price point of homes that are selling for under $200,000 is that 85% to 90% of the buyers will use FHA mortgages. The FHA Lender will put a restriction on the Seller/Investor called seasoning. What that means is that the Investor who purchased the property was expecting to have a quick exit strategy versus having to hold the property for a period of 91 days before they could sell the property to a FHA buyer. The restriction is called “seasoning of the property”. What that means is that the FHA Lender will look at the date that the Seller/Investor has purchased the property to the date that the Buyer signed the Purchase Agreement as a timeline for seasoning of the property.
Let me give you an example: Investor purchased the property on March 1st and now we need to count 90 days from the purchase before the Seller/Investor can even enter into a Purchase Agreement with the Buyer. So… the month of March has 31 days in it, the month of April 30 days, and the month of May has 31 days. I would recommend that the earliest day that a Buyer can even present an offer to the Investor would be May 30th as that would be a total of 91 days. FHA does not count the days from the date that the Seller/Investor signs the Purchase Agreement but instead goes from the date the Buyer presents the offer.
This is very important to know as I had one FHA buyer that was denied for a loan because they submitted the offer 60 days into the 90 days but I as the Seller/Investor accepted 91 days into the 90 days. I argued with the Lender that it was not an acceptable offer until the Seller/Investor accepted it but, FHA has their own guidelines and denied the loan anyway. They wouldn’t even use an addendum to correct the dates and said that they should not even start processing it until the 90 days was up.
Therefore, when you are selling a house using the exit strategy to sell the property to a buyer using a mortgage, you will need to know what the requirement is from the Lender as to how long the Seller must own the property “seasoning” and add that additional 3 months of holding costs plus another 30 days to close for a total of 4 months into your profit.
Conventional, USDA and VA Mortgages will allow the Seller to own the property for a minimum of 30 days. I have heard that they will allow no seasoning through the grape vine, however, I have never flipped the house that fast that needed some rehab to test that theory. Obviously if you as the Investor/Seller were selling the house to a Cash buyer, it can close the same day you buy it allowing for a simultaneous closing. There are some conventional mortgages that will say they are conventional and you will think that you don’t have to worry about seasoning but I have called and have been informed that they are mirroring FHA guidelines even though it is a conventional mortgage. What that means again is, you have to hold the property for 91 days prior to selling the property to your end buyer using FHA financing.
Another requirement that FHA mortgage buyers’ lender has is that you will need to have two appraisals on the property to confirm the value. Should either one of the appraisals’ value come back less than the offer amount then that is the value that FHA will lend to the buyer. Once a FHA appraisal number is given to your property, that value on the home will stick to your property, NOT THE BUYER, for a period of 4 to 6 months stopping you from selling the property to another FHA buyer unless you accept the lower value.
Make sure you know what type of financing buyers will use on your house that you are flipping so that you are able to maximize your profit. Always fully disclose to your buyer’s lender that this is a flip house and find out their requirements BEFORE you enter into a Purchase Agreement.
Please keep sending me your questions and topics that you would like to hear about, so I can be sure to keep feeding you with the information that you need in order to move through 2017 with high success and help you bring your Real Estate Dreams to Life this year!