Re: Seasoning Question - Effects on REHABS - Posted by Ron (MD)
Posted by Ron (MD) on February 13, 2001 at 19:02:02:
When my buyer is going conventional, I don’t have to do anything. As long as it appraises (which mine always have), it is just a matter of the buyer qualifying.
If the buyer doesn’t qualify for the conventional program, or has a particular lender they want to use, the deal is usually FHA. Before I will even accept the contract, I call the buyer’s loan officer (whether it’s a loan officer the buyer had or one that I referred him/her to) and confirm that the buyer is likely to get the loan and the lender is willing to lend on unseasoned properties.
If the deal is financed FHA, I always have to provide something. Usually, I prepare a one-page summary of my scope of work so that the lender and FHA can quickly see all of the work I’ve done (or, at least the larger things). I also provide my detailed scope of work that was used by the contractor for the job. (I doubt that anyone wades through this 5-6 page document.) In one case, the lender asked for a copy of my receipts, which I did provide. In another case, the appraiser asked for the receipts, which I also provided.
I have a strong preference for the conventional program for these seasoning issues, plus a few others. First, I’ve had absolutely no problem with getting the appraisals at the selling price. Sometimes, the FHA appraisers are so nervous they want to hold down appraisals, even though your house is completely redone and a cut above anything else nearby. Another reason I like the conventional program is that it is a CRA program (Community Reinvestment Act) which means the lender makes it more attractive to city buyers through lower interest rate, no mortgage insurance, and lower closing costs. (Bottom line, less cash needed by my buyers and lower monthly payments…which both make my houses more attractive to my buyers…putting my fully rehabbed payments on a par with rent payments for lesser homes.) Finally, FHA loans require the seller to pay certain buyer lender fees. These typically amount to about $500, which I don’t pay with the conventional program. (I have to admit, however, that I think I can be smarter to including wording in my contracts that include these lender fees in the $2,000 buyer closing costs I typically pay.)
I would like to simply reject buyers who don’t qualify for the conventional program. One problem is that the loan officers make only a modest commission on the CRA deals, so they aren’t very aggressive working them.
I try to avoid deals with realtors. I usually don’t multiple list my homes, trying to save the commission. I do usually mitigate the commission expense by paying less of the buyer’s closing costs if there’s a commission involved. Another problem with realtor deals is the realtor usually has a lender and title company he has a relationship with. That takes me out of control of the situation and, usually into an FHA deal. You would think that another drawback to a realtor’s involvement would be that they try to drive down the price to the benefit of their client, the buyer. In fact, my experience has been that they will push hard for whatever terms I tell them I’m looking for. (Usually, buyer’s agents will call me before writing up the contract so they can move the buyer’s offer toward what I’m looking for.) Clearly, agents are usually interested in protecting one interest above all others…their own.
It is important to try to find loan officers and lenders that you can work with. Will they handle unseasoned properties? Are they interested in loans in your price range and geographical area? Are they too busy to follow up with your clients? Can they handle different grades of credit? The best way to find good lenders is through referrals. Many are too busy working on bigger loans for more qualified buyers. You need someone willing to work harder, which is often what’s needed in lower price ranges with first time buyers.
Finally, when I make offers for fixer-uppers, I target a profit of $20k. (Usually that means you start your offer a bit lower, so you can “give” a little when the seller counters.) If I run into problems (e.g, repair costs are higher, etc.), I just don’t worry about it because I’m still likely to make $15k. Most of mine average very close to $20k, but I don’t even feel a little bad if it’s only $15k. (Fifteen deals per year times $15k per deal is still a pretty good living.)
I does take a fair amount of capital to do this many deals per year. I typically own 8-10 houses at a time, each in a different stage of repair, sale, or contract.
Hope that helps.