Is this just not the time to buy fix and flip, or can this still work in these hard borrowing times witth a bank w/o owner financing.? Thanks
It can still work but its not as easy as several years ago. It takes more knowledge of your local market and better credit to get bank loans. Several general guidelines that I follow:
- Know your market. Know what SELLs (not just what’s for sale) at what price.
- I deal in upper level starter to lower mid-level properties…properties that appeal to a reasonably large market segment that should have decent credit
- Buy at serious discount only (the most important guideline)
- Rehab so that your property is OBVIOUSLY BETTER than its competition
- Price below the competition.
- Attention to detail…buyers are extremely picky and tiny details can sour them on your property and keep them looking at other properties instead of buying yours.
jmd_forest
I know you are asking about flipping, but you may want to also consider a wrap or AITD. Many wanna-be homeowners can’t get qualified the traditional route these days. By offering owner financing, you open yourself up to an even bigger market.
Sorry if this is a dumb question, but what is a wrap or AITD? I did a search and see people mentioning them, but no explanation of what they are really.
Found on www.homesurfer.com:
wraparound mortgage - (also called a “wrap”) a junior mortgage having a face value of the amount it secures plus the balance due on the first mortgage. The mortgagee collects payments based on the face value of the wrap-around mortgage, makes the payment due on the first mortgage, and keeps the difference. The “wrap” often carries a rate of interest higher than that of the underlying first mortgage, thereby profiting the holder of the wrap. Wraparound mortgages are generally used in an environment in which interest rates have risen rapidly, making it attractive to leave an older low-interest mortgage in place when the property is sold. The seller is typically, but not always, the maker of the wrap. Note that a due-on-sale clause in the underlying first mortgage may affect this strategy.
all-inclusive deed of trust (AITD) - a junior mortgage with a face amount totaling the actual amount owed under the junior mortgage plus the amount of any senior mortgages. The mortgagee collects the total comÂbined payment from the mortgagor, pays any senior mortgage obligations, and keeps the remainder. AITDs are most commonly used where the senior mortgage interest rate on a property is low. A purchaser of the property may wish to keep the existing mortgage in place, rather than obtain a new loan at a higher rate. Alternatively, the seller of such a property may wish to charge a premium over the actual cost of the underlying debt.
Basically, you would profit from charging a higher rate. Your mortgage amount could also be for a higher amount than the underlying mortgage. The buyer would pay you directly and you would in turn pay the underlying mortgage to a bank (if applicable) and keep the rest of the payment for yourself. This could be useful if a buyer can’t get traditional financing on their own. They can pay you a premium rate for taking on a higher risk by loaning to them.
Hey thanks for that Justin.
The idea for helping finance the buyer of a flip was interesting, but we plan on being out of this area in 5 years, so the wraps and AITD’s don’t sound like something we should get into.
Why not? They can mail a check to you anywhere. And they may refi out of your loan to get better terms when the economy turns around anyway. Only if they default will you have business at the physical address because it will be yours again.
Question about these though. If I as the seller decides to quit paying the original mortgage, the buyers get the house ripped out from under them right? What insurances can a seller offer a buyer that this won’t happen?
There’s the due on sale clause in most mortgages too, but I hear banks will almost never call in a performing loan.
Interesting sidetrack from the initial question. Wraps, AITDs and NARS Trusts always sound simple and appealing on paper, but the potential risks are enormous! MikeInCali brings up some of them with the comments about defaults and due on sale clauses. I have heard of many renters and lease-optionees that have been evicted because the seller stopped paying the mortgage. The same holds true for these other instruments. If I was not the one paying the bank directly and seeing the mortgage statements every month, I would not be involved on the buying end of any of these. As a seller I really like lease options in tough-to-sell markets and for long-term capital gain reasons.
Back to the original question of “Are times too bad for flipping?” I think jmd_forest nailed it. Any property is a good value . . . at the right price and terms. Prices can look great but if homes are selling at only 30 - 40K over your price, the deal is not a good one. Most new investors, and many experienced ones (me included) under-estimate rehab costs. If proffit margins are not at least 40K true net proffit, I wouldn’t try to flip in a slow-selling market.
The problem now is not the low prices of houses, it is the unavailability of credit. If they can’t finance the deal they can’t do the deal.
That’s exactly what I’m running into right now. This is the first time I placed anything under contract without getting credit approval first. Of course everything has changed as far as lending standards from just a couple months ago when I called all around. We saved up some money for this, but we were counting on getting in w/ 15% down. Now everyone is talking 25%. We just had a bank waste our time for 9 days of our contract period only to deny us for the properties being out of their area and the business being <2 yrs old. They knew BOTH these things up front. Just one of my many frustrations with this bank…
It is no doubt harder than it was, but if things are selling in your area and you can get a deal and know how to fix it cheap, then why can’t you make money?
Some things are being sold as “fixers” but they might not need too much work.
The hurdle definitely seems to be financing as before it was easy for virtually anyone to get qualified.
On the other hand you have less competition from other flippers…how many people have the nerve to flip a home in this market?
The key is offering a good value to the buyer. Why wouldn’t they buy your home if it’s a better value than the other ones on the market?
cool