I’m preparing to get my feet wet and buy my first property at auction. I’m not a pro, work alone, and I’ve been doing a ton of research, watching and learning, tracking sales, and watching properties that went across the auction reappear on MLS.
So far I’ve been able to answer most of my own questions (thanks Sean for the forums and great site!). I’ve got a question about financing, so here goes:
I know that at auction you pay with cash or cashier’s checks, that’s not what I’m asking. Once the property is yours and you go list it on MLS, say within a month, I’ve heard of lenders refusing to write loans for buyers even if it appraises right, because they see the huge difference between the flip price and the sale price. My friend who is a mortgage broker also said that FHA or Fannie/Freddie have specific requirements of up to 6 months before they will write a loan on an auction property. He said the same applies for a property that I bought cash, and now want to keep (to live in or rent) but refinance myself so I can get the cash out and buy my next property.
So… I see the pros buying multiple properties a day. Are they buying properties cheap enough where their potential buyers (after the flip) are able to buy cash from them? There’s got to be something I’m missing.
The FHA rule is 90 day. Most “flippers” simply avoid FHA offers. Some even add something to the confidential remarks in the MLS to state that FHA offers will not be considered. You’ll occasionally run into this with other lenders as well, but it is primarily an FHA issue. With some of these non-FHA lenders you can submit documentation regarding the condition of the property at purchase, the fact you paid cash for it, that you bought it without title insurance, repairs you made, etc. and they will waive the requirement. The main thing the underwriter wants is something to cover their butt should the loan go bad down the road.
For now the market is strong enough in many areas, that it is a non-issue. If you price well you might even get multiple offers or even have cash offers.
I am now tangled up in this 90 day “title seasoning” lender web. I bought in early Jan, got an acceptable offer a week later (35% gross profit) from a buyer with a 20% down payment and good credit. The appraisal was well above price, title good, FHA not involved, just a conventional loan. Everything was looking great until 1 week before closing. The lender submited the loan to a GNMA underwriter who raised the 90 day buy/sell red flag. Charles’ above web site explains the latest rules but even though the 90 day rule has been relaxed, there are still hoops you must jump through!!
So, I thought I had better find some small local bank that would not be so particular as this national lender, but after visiting 2 such banks I learned the following: ALL FIXED RATE home loans that banks originate, both large and small banks, are sold to Ginnie Mae or Freddie Mac and their underwriters are following the 90 day buy/sell rules. If you do an ARM, the banks will often keep the loan in house and no 90 day problem. So, it seems there’s no escape if the buyer is doing a fixed rate mortgage!
My sale is still possible since the GNMA underwriter that raised the flag is now asking for a second appraisal (one of the hoops mentioned in Charles’ above web site). If this second appraisal comes in OK, I’ m hoping that will be the end of it and the loan will be approved.
(Here’s a suggestion: Let’s NOT put our health care system under government control.)