The flipping rules
Sam Schneiderman, Broker-owner of Greater Boston Home Team tells the story of a developer who doesn't like the flipping rules.
FHA won’t finance properties that have been bought and resold within 90 days. The majority of higher volume lenders and wholesalers have also applied that rule to all of their loans. Some allow exceptions if they see satisfactory evidence that supports the increase in value from the original price. Many lenders also require similar evidence for properties being resold at a higher price within a year. Some PMI (Private Mortgage Insurance) companies are also on the bandwagon.Let’s say that an investor/rehabber named Martha buys a property at foreclosure. She has her own workers and some outside contractors upgrade every interior surface of the house. They install new kitchen cabinets, bathroom tile, new fixtures and her own workers put a new layer of shingles on the roof.
Because Martha employs her own workers, who also work on Martha’s other projects, she’s able to get some work (like the roof) at wholesale so that she can add to her profit. (She also pays the employer’s share of taxes, workers comp, unemployment contributions and vacation/sick days.) Because she uses many of the same contractors about ten times a year, she gets a substantial discount from them. Because she accepted the risks of buying the home at a foreclosure auction with a 30 day closing and no home inspection, Martha had to go to a “hard money lender” that charges fifteen percent interest plus three to five points (percent of the loan amount) up front, so every day costs her big money.
Let’s say that Martha bought the property for $200,000, and it cost her about $35,000 to rehab the property in 5 weeks. She puts it on the market, gets multiple offers on her renovated property and accepts an offer of $300,000 from buyers with strong credit, a good down payment and a good buyer’s agent that knows how to move a transaction to closing. It looks like Martha will be walking away from the closing with about $45,000 after commissions, attorney fees and tax stamps, interest, etc., before she covers upfront costs like financing, legal and business overhead. Then, she has to pay taxes on what’s left.)Because time is money, Martha wants to close ASAP but her buyer’s competitively priced lender will not close sooner than 90 days from Martha’s purchase date unless they see satisfactory evidence that “justifies” the increase in value from Martha’s purchase price. Other lenders request similar evidence, however, there are some that will finance the purchase at higher rates.
Martha’s challenged to produce receipts for her “invisible” overhead costs, and she feels that she worked to locate a foreclosure worth buying, took the risks, paid high interest rates and worked hard to improve the property and get it back on the market quickly.
She feels entitled to whatever profit that she earns and the lender’s only concern should be the “as-renovated” value of the property. Martha’s concerned that lenders are trying to control her business and income. She knows that holding the house longer will cost her more in interest, thereby increasing the cost of housing to her buyers. Martha feels that the flipping rules are detrimental to her as well as her buyers.
Do you agree or disagree with Martha?
Do you think that lender’s should decide if the increase in value is justified or should they only be concerned with the improved value of the property?
Lenders, let’s hear from what you have to say, too.
