May 11th, 2010 11:59 AM by Diego Quintero
Over the past year I have seen many investors attempting to revisit the old business model of the “fix-n-flip.” This type of investing proved to be simple and lucrative to most people from 2001 to late 2005, even for the novice investor. As investors flock back to the marketplace, they are finding themselves in between a rock and a hard place - trying to find a common ground between themselves, buyers and banks.
The major dilemma lies in the appraisal. When the new buyer needs a mortgage to purchase a home, an appraisal is performed. This will allow the bank to measure risk, based on the home’s value and additional information contained therein.
The new laws that affect appraising (Home Valuation Code of Conduct or HVCC) have further depressed the market. As appraisers are seemingly drafting reports that lack in-depth research and careful analysis, we are finding that home values are reported very conservatively. While this allows banks to mitigate risk on declining markets, it is not boding well for the investor who wanted to make a quick buck. The result is usually a low appraisal, which leads to either renegotiating the sales price to a lesser value, or the transaction falling apart.
Another issue lies in time lines regarding the earliest that a property can be sold after purchase.
For example, the Federal Housing Administration (FHA) has written separate guidelines for these kinds of homes. Two appraisals are generally required and the bank will use the value of the lesser report.
Additionally, a line-item cost breakdown may be required. This means that the investor will need to provide proof of items that were purchased, including labor.
Usually investors who are savvy, will do some of the work themselves or barter with workmen to decrease their costs to improve the home. Both guidelines are challenging to overcome, but if you acquire a home at a low value, it may still result in a winning situation.
The FHA has those separate guidelines that reach the 90-day period of ownership. After 90 days, the new buyer can use the FHA loan program, and may forgo the added rules leaving the investor in a better position.
Some conventional lenders, as opposed to FHA, have a 6-month time period before a resale can take place. Those lenders are usually the conservative, yet better-priced lenders. However, they can also request the line-item cost breakdown sheet in the event that the appraisal comes in low and a rebuttal to the report is issued.
For the most part, rebuttals do not work to increase the value of an appraisal. The bank usually selects the conservative value before lending on a property. There have, however, been remote cases where a rebuttal works.
There are several other factors realtors and investors should know before entering the marketplace.
In order to be a valuable resource for investors, Realtors should know the details of a typical fix’n flip scenario. Your mortgage broker can be the most essential resource to ensure investors a successful outcome. A knowledgeable mortgage broker can partner with the real estate agent to create a more detailed and accurate comparative analysis and help the investor gain confidence.
Begin building teams that work to protect the investor and create more business for the future.
Your Mortgage Broker,
Diego L. Quintero