How To Flip --- Legally
Ok, so I've done more reading and I'm leaning towards focusing on foreclosures and double closings as my niche. I understand that there are seasoning guildelines for loans such as FHA. So my question is, how are people flipping properties without satisfying the seasoning requirements? I've seen several "success stories" talking about so and so made so much money off of their first deal, "in just 5 hours of work!"
Here are my initial thoughts (feel free to correct me if I'm wrong):
1) Seasoning is only a requirement if conventional methods are used to finance the loan. For instance, if I find a property, and go to a bank to get a mortgage loan, I'm subject to the seasoning requirements. However, if I use private investors or hard money lenders, I can throw the seasoning requirements out the window.
2) They're done illegally.
Thanks for any and all advice!
You can always assign your deals to other investors for an assignment fee.
I don't think there will be seasoning problems if your investor has all cash or has a hard equity/money loan or even a private lender.
Quote:My question is, how are people flipping properties without satisfying the seasoning requirements? Here are my initial thoughts (feel free to correct me if I'm wrong):
1) Seasoning is only a requirement if conventional methods are used to finance the loan. For instance, if I find a property, and go to a bank to get a mortgage loan, I'm subject to the seasoning requirements. However, if I use private investors or hard money lenders, I can throw the seasoning requirements out the window.
2) They're done illegally. tungacta,
Let's address #2 first. Property flipping is legal. The FHA title seasoning requirements are meant to stem the fraudulent loan activities unscrupulous investors use to facilitate their property flipping.
As to #1, you will not have to worry about title seasoning when you are acquiring foreclosed properties. So when you go to the bank to get your mortgage to buy the property, you only need to worry about your ability to qualify for the loan.
Once you have the property, and you are planning to flip it, your buyer may run into the title seasoning restrictions behind FHA loans. If your buyer does not use an FHA loan, then your buyer may not encounter this problem.
If you have already identified a good mortgage broker who can fund a loan without regard to title seasoning, just steer your retail buyers to him. If you are wholesaling property, your buyers will (most likely) already have cash in hand, or, their own hard money lender in the wings.
good points DaveT.
Flipping has been given a bad name because of unscrupulous investors. What they basically did was loan fraud by getting inflated appraisals. The buyer would get a loan for MUCH more than the property was worth because of the inflated appraisal (hence more profit for the investor). Many of the properties got foreclosed on and the bank now had a property that wasn't worth even close to what they loaned on it. Guess who had to eat the difference ?
Lenders have started placing title seasoning requirements where the home must be owned for 6-12 months before they will lend on it. This applies to non-FHA as well. Every lender is different and I can call 10 different ones and get 10 different answers. The good news is that not all lenders have it. Stick with the ones that don't. The hard money lenders that I work with do not care how long it has been owned. Personally, I would rather assign the contract.
Hope this helps !
Jason
Rather than calling ten lenders, why not just call a couple of mortgage brokers who already know the lenders who will work without title seasoning requirements.
DaveT,
Great idea! I was just illustrating a point. Now that you brought it up, my girlfriend is a full time broker and I work part time with them, so I get the privilege of calling them myself. Your are right though, everyone needs find a good broker to do the legwork of 'shopping" but make sure they don't charge a bunch of "junk" fees.
Jason
Thank you all for the assistance. Things are a little clearer now
tungacta
A recent article I read:
"Flipping, Is it Illegal?"
There has been a lot of controversy over the term “Flipping”. Is it illegal or not? The bottom line is no, it is not illegal. What’s illegal is mortgage and appraisal fraud.
Here is a quick overview about why the term “Flipping” has received such a bad rap:
This all started back when some investors, realtors, mortgage brokers and appraisers got together and designed a plan to make some quick cash in real estate. First they found a buyer that would qualify for a 75% - 90% mortgage with decent credit. They would give the buyer a list of properties that was in the price range of what the buyer could afford. They told the buyer to go and look at the properties on the list and once the buyer found one he/she liked, the investor/realtor would go and make an all cash offer at a small discounted price; a price that would, more than likely, be accepted by the seller.
Once they got that property under contract from the seller, they would turn around and sell it for about 20% or so over the true market value of the property. The appraiser would then appraise the property at the over inflated price. The mortgage broker would write up the mortgage at the percentage that the buyer would qualify for and the investors/realtor would end up carrying back a second.
In short, here’s what happened in these types of transactions:
Let’s say the buyer could qualify for an 85% first mortgage. The investors would find a property that was truly worth $100,000 after it was fixed up but was maybe listed for $80,000. They would try and get the property for $60,000 - $75,000. Maybe the investor would even spend $3,000 - $5,000 for clean up, fix up and paint the property. They usually would not do a great rehab job on the property. They would then sell it to the buyer for $120,000 with the seller/investor paying the closing cost for the buyer. This way the buyer could get into the property with nothing down.
The appraiser would then appraise the property for the $120,000 purchase price and the buyer would get a first mortgage of say 85% or $102,000 and carry back a second of $18,000 with every intention of forgiving the second mortgage.
If the investor paid the closing cost of $4,000 for the buyer and had $5,000 in cleanup and fix up costs, they would have spent about $9,000. They would conduct a simultaneous closing with the seller and buyer.
The seller would get their $60,000. The investor/realtor would recoup their $9,000 and would end up with a profit of about $33,000. As far as they were concerned, the property was only financed at about 100%. The problem is, the buyer was only qualified for 85%. They took the money from the loans and usually forgave the second mortgage as a bad dept and were able to write them off their income taxes to offset the income they made from the transaction.
Here’s where the problems started:
Many of these buyers never made their first mortgage payment and there was a high record of first payment defaults. The lenders started to check into this issue and discovered all the fraud that was taking place with the over inflated appraisals and the second mortgages that were being written off. They also discovered the poor condition of the properties. Even though the investor made some improvements to the properties, they never fixed them up to meet the appraisal.
Because this all occurred through simultaneous closings, the media termed it “Flipping” which is what it was. The problem was the fraud, not the fact that the property was flipped.
After this became an issue, the mortgage industry decided to change their rules so that this would not happen to them in the future. They started requiring seasoning of ownership. This created a problem for the honest rehabbers in the business.
If a rehabber bought a property for say $60,000, put $20,000 into rehabbing it and sold it 4 months later, the lenders would not finance the new buyer. That hurt a lot of investors because they needed to get their money out of the property to start the next rehab; now they had to wait another month or two to be able to sell it so that the lenders would feel comfortable giving the buyer a new loan.
FHA was one type of loan that did not require the seasoning of ownership. However, now they do. They are also requiring a 90-day minimum ownership before they will allow an FHA insured loan to be placed on a property.
For the most part, the “Flipping” issue has settled down and a lot more lenders are relaxing their rules and guidelines for seasoning. They are requiring that you document the condition of the property when you buy it and the work that was done to the property. I actually think this is a good thing. It will force rehabbers to do a good rehab on the properties and weed out some of the bad investors in the business.
I still “Flip” properties today; there is nothing illegal about flipping a property. Don’t commit fraud! Document your transactions and everything will work out ok.
We should start using a different term for the word “Flipping”. I have been starting to use the term “Quick Turn”, that’s from Ron LeGrand.
Wholesaling properties is also a “Flip”. The term “Wholesaling” sounds a lot better today than “Flipping”. There are many ways to flip (I mean “Quick Turn”) a property and there are many advanced, creative real estate strategies that don’t require quick turning properties.
One of my favorites is to “Slow Turn” a property. I sell the property on terms, whether it is a Lease with Option or a Contract for Deed. By the time your buyer gets a new loan to cash you out, the seasoning issue is no longer an issue.
Since you mentioned double closings I'm sure you are interested in Wholesale Flipping. If this is the case, FHA seasoning isn't going to be an issue for you, because you are not going to be flipping to FHA buyers. You will be flipping to investors who have cash, and if they don't have cash you need to make sure they are getting there money from private lenders, or from a lender that you know has no seasoning issues.
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God bless Steve,
Anyway the deal is and there is really no way to organize just recognize whats going on. Realtors are now getting in the picture. It has to do with politics. I understand trying to stem fraud all for it. Its called jail. My problem is why a appraise with title. Dosent make sense. But like I said way back. You guys have to find out who the players are new requirements are popping up and guess what. You guessed it. It involves realtors yes the second most powerfull lobby on capitol hill. Or could be just maybe they have a new friend somewhere in a place that can help uh hud maybe?. Where this all started was back in calif way back when when they had plummeting values and deflation in theyre real estate market. They have a 2 year chain of title requirement. Again I will repeat it makes no common sense to appraise the home with title. If lenders in some cases would look at the picture and see that we help to and title requirements are going to hamstring them to. Lets put it this way this recent ressesion has them drowning in reo.s. Guess what i never contact them directly now might be a time to establish a relationship with some of them. Just some thoughts.
moneyprivate
Jesus is the reason for christmas
HouseBuyerGuy,
You may want to submit that post as an article.
So if Flipping is Legal could somebody help me out i have 2 property under Contract and looking for buyers but cant find because they go for a mortgage and cant find because its a flip ?
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You will have to locate a lender that doesn't require seasoning. A good broker should be able to assist you and you in turn could send the potential buyers to that broker.
I bought a property for $50,000 cash and sold if for $120,000 in 9 weeks to someone with good credit. I was not flipping because the person I sold it to did not flip it. I think flipping is when you flip the property more than 2 times within a years time. But if you are flipping for cash the Title company doesn't care. The person I sold the property to wanted a copy of the work that was done to property. That satisfied the lender. Or you could assign the contract to another investor as long as there is enough room for the investor. Good Luck
hi did the buyer went for mortgage to a FHA lender ?
thank you
Almost all conventional lenders , both conforming and non conforling are following in the FHAs footsteps. Basically with all time high foreclosure rates and huge amounts of loan fraud, this matter will only get worse. There are plenty of lenders that will loan 80-90% LTV... You have to be creative to get the deal done. That is why we are all here isnt it? Together we will get around it
Quote:
On 2003-12-18 08:22, jhadd wrote:
DaveT,
Great idea! I was just illustrating a point. Now that you brought it up, my girlfriend is a full time broker and I work part time with them, so I get the privilege of calling them myself. Your are right though, everyone needs find a good broker to do the legwork of 'shopping" but make sure they don't charge a bunch of "junk" fees.
Jason
As of jan 2004 brokers are only allowed to get paid a Broker Fee. No more junk fees
Lori
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to all posters above: Guidelines are not laws just a set of criteria to be followed when doing a loan transaction. Just because a guideline "SUGGESTS SOMETHING" doesn't mean that it can't be done. A bank will take any deal that makes sense!!!!!!!!!!
Lori
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