My first flip and I need some feedback

I am a mortgage broker in NJ who does FHA transactions all the time. IT IS NOT TRUE that FHA appraisals always come in low. Yes, they look at all recent sales, but so do conventional appraisers. They have to. Also, there is no way that any appraiser is going to come up with a value without looking at the inside of the property.

There are new laws, however, that pertain to the length of time you have owned the property. I am not well versed in all of them, but the do not allow a person to flip a house in under 6 months for a big profit, UNLESS YOU CAN SHOW RECIEPTS THAT YOU HAVE REHABBED THE PROPERTY, which you probably can. In other words, you have to justify the price increase.

As long as your profit is there, I would take the FHA offer if I were you.

Mark

Make sure you have all your receipts and information available for the appraiser...they cannot base their decision on that alone, but it can help. Also, talk with your Realtor about exactly what is selling and for what price. That will help you feel a little more comfortable with what the appraisal will come in at. If there is nothing comparable selling over $60k, you may have a problem, but if there are a couple others comparable selling around $70k and $75 (not a ton, but a couple) you should be fine. What your Realtor can pull for you will be the same thing the Appraiser will probably be lookng at.

See what your Realtor can shed light on for you and make sure you have all your rehab documentation together to help the appraiser see the value in the home. Good Luck!

I do have all my receipts, but the first thing my agent told me was that the FHA appraiser is not allowed to talk to anyone involved in the sale. (Maybe they got such a bad rap when the market was ballooning.) I'm pretty confident they are not going to ask for my receipts. If they look at what I bought the house for in November, it's going to look like I'm making a bunch, but obviously, the listing shows that everything is newly remodeled.

Also, I have heard stories from rehabbers here that they WILL appraise the house without looking at the inside. I don't know....maybe that was awhile ago and it has changed?

I can tell that my agent doesn't want to tell me what to do, but he did not jump yesterday when I told him to go ahead and accept. He just emailed me more information and told me to sleep on it.

My girlfriend at work that took classes to become an agent (but didn't continue on that path) also told me she feels that it's hard to get approval with FHA.

I had to decide today before 5:00 PM, and I think I'm going to pass on this one offer. I know that the spring and summer is when everyone moves since school is out here in mid May. I have a lot of chances of getting more offers. After the tax credit thing is up end of April, I'll be more inclined to go for it. That was the only thing holding me back knowing the house would be off the market during this time. Last time everyone thought the tax credit was ending, the was a big flurry of activity. My agent confirms.

I do appreciate all the feedback and I'll let you know how things progress.

You're worried about something that hasn't happened yet. If it doesn't appraise out, you'll have to put it back on the market anyway. You were confident in the agent's list price to market it.

Honestly, if appraisers were not going inside homes when doing the appraisal that had to be quite some time ago. If the appraiser doesn't go in the hom you can file a complaint. There are a lot or restrictions on appraisers now and they do actually have to check out the whole property.

The biggest thing is going to be comparables though so once again, I would go to your Realtor and get clear comparables and see where your property is at. As long as others have sold around $70k to $75k you are fine, but if none are over $60k then you are going to have some trouble.

Best of luck and keep us posted.

I would take chip and andrea's advice... Get your realtor to get you comps in the area and see what those comps come back as... If you have a few comps at or around 70-75 then jump on that offer and you will be fine...

That is what I would do....
Shaun

Good luck and guess what, your doing and have done something!

As Chip and Andrea said you can have a low appraisal re-evaluated. What I have noticed is that appraisers are walking a very weird fence line in that they are hesitant to under-evaluate for tax revenues, and they are as hesitant to over-evaluate for financing. Subsequently your appraiser can be much like an REA. Maybe you got a good one, maybe you didn't. I have already had to drag an appraiser through a house, WITH A TAPE MEASURE, and re-work sq. footage. As with the REA problems that many of us face these folks can be just plain lazy. Furthermore, they feel a sense of entitlement that their word is final and that's it.

Good luck on your first flip. Most people don't take into consideration the upfront closing going in and the back-end realtors commissions going out, as well as all the real costs to truly fix to perfection. Not to mention that you better be the best house on the block, period, with the lowest asking price to get out quick.

Be careful about cutting your Realtor's commish. That was your fault and not theirs. You'll get a bad name in your market quick and they will blackball your houses. Take care of those who take care of you!

Best of luck and I will watch to see what happens.

Stan

O.K....Here is the info. I got a offer accepted on a 3bd 1.5 bath that was bank owned. Property was originally listed at 85k. I purchased the property for 57k and the comps in the area are 110-115. It only needs about 10k in rehab (new kitchen, paint and baseboards). I am using a local hard money lender and my are around 7200.00 if it takes me 4 months to rehab. My concern is they are asking for a few items that I am not familiar with.

1. Copy of the scope of work from Contractor. Since (I have construction background I was planning on doing most of the work myself(

2. Refinance Pre-Approval letter. With the current market conditions, it is not always possible to sell the property in the short term of our loan so we require everyone to provide proof that they can refinance out of our loan.
(How can a lender pre-approve a property for re-fi before it is rehabbed?)

3.Name and Phone number of the insurance agent holding your Builder's Risk and Liability Policy (is this normal? And does anyone know how much this runs?)

I plan on holding the property and doing a lease purchase because it should cash flow about 400.00 month.

I would attach my property analysis for everyone but I am not sure how...
Any help would be appreciated.

Hope this helps. Here is what I have done.

1. We incorporated into an LLC. My background is construction and finance. I built a monthly/weekly progression of rehab costs and backed up with estimates from companies that were doing what I am not going to do, along with estimates from our own LLC of things we were going to do. Trust me on this one, if your numbers make perfect sense you CAN get a hard money lender. EASY. If they don't, then it will be problematic for you.

2.We provided financials to a local bank to refinance out of deals that we are flipping. Two reasons. As you have mentioned, I don't want to be stuck with the property, and two, I really want to owner finance the property and draw my equity and then sale the note after 12 months as to avert the taxes.

3. As an LLC we will always carry general liability, workers comp, and construction insurance policies on any property that we are flipping or rehabbing. No hard money lender will do so without these. What if the thing burns down one night? These will protect you even more so than the folks that are requiring it. Prices are based on overall construction costs, property ARV value and permitting required. Here is where most people get lost. If you are rehabbing over 10K (varies state by state, but they are all close) you need to be fully licensed, and all work has to be fully permitted. The fines are stringent and rightfully so.

Stan

Yes, don't forget the insurance policy. I actually was so excited that I got my first house that I didn't get my insurance in place until a couple of days later. NOT a good idea, you never know when lightning will strike. My house is small and I got a Builders Risk Policy because that's what they told me I needed. It was $375.00 for 6 months. Not too bad. Replacement value is $87K.

When you see that number you think my list price of $69.9K is pretty good, although it's a little high for the market because of all the REO's. That is my issue, but I can't go much lower. Lesson for next time is to do it for less dollars.

I did not use a contractor, but I used someone that I know and trust for most of the work, plus other companies for things like flooring and a little electrical. I did not need any permits because we did not change anything structural. This was all paint, kitchen, flooring, bathroom and every freakin' door in the house had to be replaced! Even siding outside! Yes, I replaced the shower curtain in the bedroom for an actual closet door.

I understand hard money lenders want to see everything because I looked into using one. I heard they sometimes will come down and check out the work and pay as you go along. Some of them will renew the loan after 6 months. I would like to do this next time since it would allow me to buy a larger house.

I also have my exit strategy which is....if it doesn't sell in 6 months, then I rent it and re-finance to get my cash out. That's when the seasoning period is over.

And a note about my agent. I didn't really hard-ball him to negotiate the lower commish, but I was hedging and he offered. He said he would rather make his money when I buy and he's been really helpful. I've met other investors that don't understand why I'm selling and using an agent because most don't. I like that they teach you here that you need professionals on your team. I'm still a newbie and need the advice of experienced people.

Stan, how do you do owner financing and draw your equity? I thought you had to own the house outright to do owner financing.

I did not mean my post to steal any thunder from what you have done.

You did it and you made it work! Congrats to you!

My realtor commish statement was drawn from my own frustration with these folks. I actually have found, on my own, without help from my Realtor, properties that I have offered on and made sure that the offer counted him in. Sometimes full commish, sometimes just 1K or so. Just something to keep him motivated. My own personal opinion, I will never cut my Realtor's percentage out of the back end. He/She has buyers and they want to make the most of their time and money making ability. I agree completely! I want them driving customers to my property and wanting to close, Close, CLOSE!

If your Realtor has agreed to cut commission and has buyers in your price point and there are other properties to show......well there you go. You and I would do the same thing.

I have found a couple of banks that are quite OK with me cashing out equity and owner financing/rent to own properties. They only care about 1st lien holder status.

Stan

I don't know where you are but here in Texas if your overall investment in rehab exceeds 10K or 10% property value, OR (here is where it gets screwey) you are refurbishing from investment to "new owner occupants", ALL work has to be fully permitted and inspected. This includes just lipstick cosmetic stuff. AND, you MUST be fully licensed. I have done some looking around and I have yet to find a state that does not require this.

Stan

HHhmmm, interesting stuff. I'll have to find out the laws here, however I never heard of anyone doing cosmetic repairs that had to get permits and inspections.

Then again, here in Arizona, I've also seen many an REO for sale that had an extra room built by previous owner without permits. I wouldn't buy one because I found out you can't get the permit afterward, but have to tear it all out and start over for it to be legal.

However, they sell these homes anyway. They list them as "extra room in the back not counted in tax records" or "square footage larger than list" and it's listed it right on the MLS. Then everyone knows the house lists as a 3-bed, but really it's a 4-bed. It appears to be very common and I didn't know until I started looking at these REO's.

It's clear I have to learn more about financing and all the options. I'm learning there is more available than most people think, you just have to keep calling and looking. Will work on that for the next deal.

P.S. You didn't steal any thunder. I like the feedback.

Thanks

OK, a few weeks have passed since I first posted. I decided not to accept the first offer. I did accept another offer later in April. I came down in my price a little and am paying 3% towards closing for the buyer. The buyer's inspection came through with flying colors (my agent said he NEVER gets inspections that don't ask for SOMETHING, so I did good). We've been waiting for a couple of weeks for the FHA appraisal, and sure enough it came in really low. The contract is for $69K and the appraisal came in at $55K!!! Can you believe it? Both agents think it is unreasonably low.

The other side is that my Agent said that either RE Agent is not allowed to talk to the appraiser BUT, when they know the house is a flip they are supposed to ask for documentation of the costs I spent to rehab the house. It is now required. This is a mistake on his part so he will hear about it.

Thank goodness I started my business right and kept good records so I can prove that I'm really not making a huge amount on the house, just a reasonable profit. Wish me luck and I'll post how it all turns out.

55K from the appraiser. Do they give out documented reasons to why they come up with this figure. That's 2 less than it cost you to fix the house in the first place. I hope you get a second appraiser soon because that's just ridiculous.
Stan

and all the comps are REO's of course. But it's a unfair to compare my beautifully redone home to a bank-owned mess! I've seen what they look like! I've heard of this happening to other flippers before, but we'll see what the agents can do. I sent mine a complete itemized report of what I spent. Unfortunately, this is the bad side of FHA loans. They help people, but they make it really difficult. If the sale falls through, then that guy has also lost his chance of getting the $8K credit. It will be too late. I priced it about as low as I could go and still make a little.

Well, my agent tried to argue with the FHA appraiser for the unreasonably low $55K appraisal and he just wouldn't budge, even with my documented rehab. Their strict guidelines only allow them to use comps within 1 mile. Of course he did see the inside of my house, but not the inside of the other comps which were all bank owned (or mostly). Most all of these REO's are not ideal conditions especially in this old neighborhood. I've walked through many of them.

There are two good thing coming out of this (besides my education of my first flip)....there was one other home that was a complete remodel of the same size home that sold for $92K, even though the appraiser refused to count it, I guess because it was the only one. That makes me feel like my list price of $67,900 is very good and I'm not changing it.

The second is that it's summer! School is now out and this is the season that people move. I'll let you know when the next offer comes in. The house is back on the market!

Thanks for posting all of this information. I'm about to embark on my first flipping journey, and there is a lot of stuff I learned in this thread! When I do my comps, I also try to stay within a mile, but that's about the only thing I knew to do right. I have to look up the laws in WI to see what they are regarding flipping; this may have helped me to choose to do a lease or option.

I have a crazy idea, way outside the box, and I'm going to post it on my thread so as not to steal yours. Considering the ridiculously inaccurate appraisal, are you going to rent out the property instead? Also, remember, each time an offer is made, a different company usually does the appraisal. The appraisal companies can not be chosen, and many times, appraisal companies are picked that aren't even familiar with the area. Any lay person can pull up the comps and see all REOs and make an unfair appraisal by not considering the properties condition and amenities. This is frustrating to hear! I wonder now if selling mine will even be profitable!!!

Thanks for your comments! I knew in this market that it might take me awhile to sell, so my exit strategy was to give it six months and then rent it out or do a Lease Option if I can't sell. (I'd just rather sell right now.) I'll do that at the end of the summer when I can also re-finance and get my cash out.

Also, what this low appraisal means is that an FHA buyer cannot buy the property and the FHA appraisal will stay on the books for six months. That doesn't mean that someone with a conventional loan can't buy it. They will have their own appraiser and it might be a totally different story.

Well, I decided to leave this property on the market through the end of the summer and it didn't sell. SO....(always have exit strategy in place).... I have decided to rent it.

I learned so much from the whole process beginning to end! I'm also glad I didn't have a loan this first time around because I just jumped in and did it! I guess I'm a sink or swim kinda person. And as they say, it always takes longer than you think and cost more to do a flip, but I feel so much more knowledgeable and confident moving forward.

In the mean time while waiting for it to sell, I discovered that I could borrow against the property and began to move towards a second deal with a hard money loan. This is much more work because you have to come up with a complete budget AFTER you have the property under contract, but BEFORE closing. It also really makes you look at the numbers all up front and someone else will scrutinize the numbers so you have to be real!

Another appraisal was required (since I am borrowing against this 1st property) and although it came out a little higher at $58K, it was still pretty low. The biggest lesson I learned was evaluating the neighborhood. Comps, comps, comps. Just 'cause you get a house really cheap doesn't mean it's the best deal around.

Since I was worried about this, I was very careful the second time in picking a property that would be valued higher, and I think I picked a great one! Since the market is so crazy right now and comps are all over the map, I thought the new ARV (After Repair Value) for my 2nd flip would appraise around $130K, but I was informed that it appraised at $178K! Wow, I couldn't believe it! Maybe I'll finally have my first successful flip. That will be another thread...got it today for $40K, needs over $30K in work, but I'm very excited to start this huge project.

Thanks to all who visited my thread.

Margaret