|Things to know when buying a flipped home
If your appetite for a turnkey renovated home is a flipped house, you may end up jumping through more hoops to close escrow.
So, what is a flipped home? A flipped property is a situation where the house is acquired usually by a real estate investment company (also could be an individual) and is re-offered within 91 – 180 days for a higher price than for what the investor originally acquired the home.
Usually justified by extensive renovations, including remodeling, a new roof, new interiors, new appliances…the works. In such situations, the investment company usually purchases the property from a number of sources including a bank, in a short sale, an auction and probate court amongst others.
Lenders want to be sure the property you are purchasing, if it is indeed a flip, supports the new sales price and passes reasonable risk thresholds in order to ensure a bona fide sale.
Government financing is most particular in assessing thresholds the transaction must meet for a sign off.
Under the old rule, two home appraisals were required if the property was acquired and flipped within 91 days. On Feb. 1, 2010, the rule changed to not need a second appraisal on flip transactions 91-180 days after the seller initially acquired the property, so long as the property was not being sold for more than a 100 percent increase in value from the original acquisition sale. This favorable ruling has been extended through Dec. 31, 2014.
Let’s say a real estate investor acquires a property for $200,000, invests $30,000 worth of remodeling and renovation to the home and lists the house on the market again for $260,000. Under the old ruling, two appraisals would be required no matter the previous increase in value. Presently, in such a scenario, a second appraisal would not be required because it’s a 60-percent increase in value and not a $100,000 increase in value. Granted, if the property was listed for $300,000 or more, then a second appraisal would be required by the buyer’s lender.
100 percent increase
in price is the trigger
Using the example of acquiring the property for $200,000 and reselling the property for 300,000, this constitutes a 100 percent increase in sales price and two appraisals are required. Additionally, if the second appraisal represents a 5 percent lower appraised value than the original appraisal, the lender will use the lower appraised value, which will be what the basis of the mortgage will be. Remember these trigger points are only within a 90-180 day period of time.
Ironically, this coincides with the property flipper’s clock and here’s why. Property flippers usually have their own cost of funds – usually paying anywhere from 8-9 percent maybe more for the private money they borrow to purchase, fix up and re-sell homes for a quick profit. Time is money for the property flipper.
The faster they can turn the property, the faster they can turn a profit and the less cost of funds they pay. Simple enough, right?
Either two appraisals are required and the transaction passes with the threshold tests in place, or buyer can make an offer 181 days after seller holds title or buyer change to conventional financing.
Additional flip requirements buyers should be aware of:
• Property sale should involve an arms length transaction, meaning no relationship between the parties.
• A second appraisal could be required if it’s determined the original appraisal property is in a declining market.
• If real estate investor purchases the property, buyer will have a tough time securing financing if there is more than a 20 percent increase in the property value if no capital improvements have been done to improve the home justifying the sale.
• There cannot be any pattern of previous flipping activity – this is a biggie – including title transfers in the last 12 months.
*Mortgage tip: Buyers using conventional mortgage loan financing need not worry about the additional layers of requirements government financing requires when buying a flipped house. Moreover, there is no additional stipulation for examining the previous title history of the property as well. Flipped properties can present a good opportunity for a home buyer to purchase a property with little or zero work to be done to enjoy the home.
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.