Gene's Chicagoland Mortgage Blog: Financing a Chicagoland Home "Flip"

Financing a Chicagoland Home "Flip"

"Flipping" shows are increasingly popular on TV these days ...

"Flip or Flop", "Masters of Flip", "Flip this House" represent just a small sample of the shows currently on air featuring the buying, renovating and selling of homes within a short timeframe for investment and profit.

While entertaining to watch, the rise in popularity of these shows really showcases American's ongoing fascination with home and real estate. It's also is an indicator of the return of a healthier U.S. housing market.

It seems Americans are once again willing and more capable of facing the monetary risks involved in "flipping". And real estate investors are seeing a higher likelihood of making good money.

Most of the shows shown above spotlight couples focused on "flipping" as a way to make a living. It's their family business and it generates them income.

But "First Time Flippers" on the DIY network, features friends, family members, and couples that tackle flipping a home for the first time as a way to make extra income. They have no previous experience renovating a home, it's not their main form of employment or their main source of income.

As a Mortgage Originator, over the recent months, I've definitely seen a spike in the interest and number of questions I'm receiving regarding "flipping". Both from contractors and investors, but from non-business related individuals too.

I think much of the interest is due to the popularity of the TV shows mentioned above. But the fact that local housing markets have improved have also contributed. They once again are better able to support this type of investment buying and selling.

For those considering entrance into the "flipping" or housing investment market, there's much to know and consider. The choice and purchase of property, its financing, and source of capital for its renovation probably head the list.

Below you'll find just a small sampling of the things that investors must know and consider before conducting a "flip" ... and in order to avoid a financial "flop":

Does the proposed property and neighborhood support the improvements to be made? (Work with a knowledgeable local agent.)
Where are the funds to come from for the purchase and renovation of the investment home?
Are down payment funds available for an investment property purchase? (Investment properties typically need a larger down payment made. Interest Rates on investment properties are also typically higher than on primary residences.)
What financing program best suits the purchase and renovation being considered? (Consider "seasoning" rules for each)
What term of loan should be considered?
How long will the renovation take?
How long must the title to the renovated property be held before it can be "flipped" or sold?
Will "Comparables" be available to support the newly renovated property's new (sale) Appraisal?
Tax ramifications ... both property taxes and personal (capital gains) taxes
More ...

Most of the hopeful first-time "flippers" I've talked to have not been aware that investments of this type involve a financing "seasoning" period ... meaning a period of time in which they are required to hold the investment property before they can turn around and sell it.

The length of this "seasoning" period* is dictated by the type of mortgage being sought by the buyer for the property. As sellers consider offers on their property, it's wise that they know the "seasoning" periods associated with differing types of loans.

The following are the typical "seasoning" periods for mortgages most often utilized by buyers:

FHA Loan: FHA Loans typically require a 90-Day "seasoning" period, meaning if the seller bought and closed less than 90 days from the FHA loan (Case Number Request), the deal is NOT eligible for FHA Financing at that point.
Conventional Loans: Most Conventional Loans, backed by Fannie Mae or Freddie Mac, have no true waiting periods (Some individual Banks that buy and service loans may have a different policy)
VA Loans: Va Loans do not have a "seasoning" period

(* The "seasoning" period starts as of the date of the investor's purchase (date of the Deed.)

However, it must be pointed out: In each of the above types of mortgage financing, extreme cases could warrant a second Appraisal, if the increased property value (differences) can't be supported and documented.

What is considered an "extreme" case? The following may trigger the request for a second appraisal to be made:

The Seller bought the property for sale in the previous 6 months or less, and the profit is 100% above the initial price paid
The First appraisal is inconclusive, and the Lender's Underwriter requires a second Appraisal Report be done

As you can see, the buying, renovating, and financing of a "flip" property can be a huge undertaking, even for those that are seasoned "flip" professionals. Flipping a property can be profitable. It could also spell financial disaster.

That's why it's best to educate yourself fully ... and weigh all the pros and cons ... of this type of investment prior to taking any action. Eliminating as many upfront risks as possible is key to reaping a positive profitable outcome ...

* Hoping to buy or refinance a home in New Lenox, Will County, or elsewhere in the Chicagoland area? Contact me now! I'll put my 40+ years of Mortgage experience and expertise hard to work on your behalf.
I'm easily found at:

Gene Mundt

Mortgage Originator - nmls #216987 - IL Lic. 031.0006220 - WI License #216987

American Portfolio Mortgage Corp.