One major change that affected Real Estate Investors during the housing crisis and beyond was the ability to obtain financing.
It used to be that Fannie Mae would allow Investors to have up to 10 properties financed at a time – as long as they could afford them, of course. That amount included their personal property and any other lines of credit. However, now most underwriting guidelines only allow for a total of 3-4 mortgages.
This rule has really hurt our country! Many Investors want to buy some of the foreclosed properties but cannot obtain a mortgage because of this new limit. For many Investors, this has really put a wrinkle or even a serious dent into their plans.
Another change was the amount of money needed as a down payment on an Investment Property. Most underwriting guidelines increased from 20% to at least a 30% down payment.
“Flipping” houses was also another factor that changed as a result of the housing crisis. Investors had been allowed to purchase a property, generally below market value, and then turn around immediately and sell it for a profit.
The new lending guidelines for FHA and Conventional loans now state that the property being sold must have some “seasoning”. In other words, purchase transactions require the subject property be owned by the Seller for at least 90 days from the date of the Purchase Agreement unless the Seller meets one of the following conditions:
• State or Federally chartered financial institutions and government sponsored enterprises (Fannie and Freddie)
• Sales by Housing and Urban Development (HUD) of its Real Estate Owned (REO) properties
• Local and State government agencies
• Non-profits approved to purchase HUD REO properties
• Sales of properties located in Presidentially declared disaster areas
• Sales of properties acquired through inheritance
• Sales of properties acquired by Employers or relocation agencies in connection with relocations of employees. Must provide relocation agreement indicating the Seller acquired the property as a result of company transfer of the previous owner.
• Individuals, Companies or Investors who purchase foreclosed properties and sell them are not eligible for this exemption.
So in other words, if you want to sell a property to a Buyer who is going to obtain a loan to purchase your property, you have to have owned the property for at least 90 days before you sign the Purchase Agreement. Then you need to allow an additional 30-45 days for loan processing before you can close. This could delay your selling of your property for 4-5 months! Ouch … that can really cut into your profit if you were buying the property with short-term intentions!
Furthermore, if the Buyer is putting less than 20% down at purchase and therefore needs to obtain Private Mortgage Insurance (PMI), then your sale/purchase will most likely also be subject to these additional rules:
• If the subject property has been acquired by the Seller less than 280 days prior, the lender must document the resale value if the resale price is a certain percentage over the purchase price. The value may be verified by a second appraisal, or by having the Seller prove that the increased value is the result of rehabilitation to the property. Documentation is required.
• If the subject property has been acquired by the Seller less than 12 months prior, HUD may require the lender to obtain additional documentation if the resale value is 5% or greater tan the lowest sales price of the property during the preceding 12 months!
If you are an Investor, you understand that time is money! When you take into consideration the changes made to financing, flipping a house may not be the best method of making money in this new Real Estate market.
With that being said, remember that the best defense is a good offense! Make sure you keep track of your cost basis in the property. Document everything and keep track of all of your receipts proving the costs involved in your ownership of the property.
If you purchased the asset and intend on fixing it up and then flipping it, you might want to consider spending the extra money and obtaining an After-Repaired Value (ARV) Appraisal before you start rehabbing the property. This appraisal will help in many ways. You can provide the ARV, along with your detailed documentation of everything that you have done to the property to the Buyer’s Appraiser. This should help prove the increase in value of your property.
Keep in mind that the Buyer’s Appraiser, most likely did not personally see your property before you did the work to it. Unless you have detailed information available, the Appraiser probably won’t know the exact extent of work that you have done to the property.
If the property sale was listed in a Multiple Listing Service (MLS), unless the Realtor provided detailed information stating the prior poor condition of the property, or provided several pictures of the damage, then the Appraiser will not know this information!
Generally, the more detailed the information you provide, the better off you will be!
Additionally, and especially if you are a new Investor, the ARV will help you understand the value of the work that you are thinking of performing. Over-improving a property can be an expensive rookie mistake!
Hiring the Appraiser to perform an ARV for you should provide you with tremendous insight! Take the opportunity to “pick their brain” and try to understand how he or she is viewing your property. Most Appraisers are passionate about their work and will give you a good idea of what they view as important to the value of the property and may recommend cost effective improvements.
Realtors have always joked about the value of a property as seen through different sets of eyes.
All joking aside, remember that, after all, your Buyer’s Lender isn’t concerned about what you think your property is worth … he or she is going to rely on the expertise of an Appraiser. Why not find out what he or she thinks sooner, rather than later!