The "F" Word

There's a 4 letter "F" word that most underwriters and lenders are terrified of. It sends them running scared. They get out their "denied" stamp because they think it's dirty and represents foul play. They'll go running scared if they think that their loan is an "F".

That dirty four letter word is "FLIP". What did you think it was? A "FLIP" is where someone buys a property (or even just signs a contract to buy a property), then the quickly sell this property as a higher price. To most lenders and underwriters, this time of deal looks shady and smells of foul play. Property flipping has gotten such a bad wrap in the mortgage industry that most lenders, appraisers & underwriters won't touch an unseasoned property with a 10 foot pole… and a flipping a contract??? Forget about it.

Let's back up a little bit and talk about what property flipping is and why we still have such a bad taste in our mouths. We have to go back a few years. In the early 1990s, as a whole, the mortgage industry didn't care how long a seller owned a property before they sold it. An investor could buy a property for $50,000 and sell it a month later for $100,000 and we didn't blink an eye. There were a lot of real estate investors who made a lot of money. Unfortunately, when there's an opportunity to make money, some not-so-nice people got involved in the real estate business too. In the mid to late 1990s a small minority of people committed so much dishonesty and fraud that they probably cost the mortgage industry billions. Plenty of people lost their jobs. Plenty of people lost their homes and plenty of people went to jail. Those few bad apples really did a number on us. That was our introduction to property seasoning and flips. It’s left such a bad taste in our mouths and that most lenders can still remember it.

One of the most unfortunate consequences of what happened is that we have made life much harder for the legitimate real estate investor. The investor who knows how to buy properties cheap, do a good job fixing them up and sell them to a willing buyer who appreciates what they’ve done and is willing to pay a premium for a freshly rehabbed home. The good news is that there are a few lenders who don’t think flip is a dirty word… who are happy to finance flips and the real estate investors who buy them. I still believe that real estate investing has made more millionaires than any other business out there.

Now real estate investors can go to lenders who understand them and their business.
1. It’s great to buy properties under market value.
2. Most of these properties are going to be in need of repair.
3. They can flip the property as quickly as they want.
4. Their tax returns don’t show a ton of net profit
5. Their credit scores may not be the best.
6. They need to move fast…

Here’s how it works… Let’s take the same scenario we used before.

An investor buys a property for    $50,000.
The property needs repairs of      $15,000.
Once completed, the investor will be able to sell the property for $100,000.

If the investor takes this deal to a traditional mortgage company, the following will probably happen:

1. It will get rejected for property condition
2. If it gets approved, the borrower will probably get a pre-payment penalty holding him back from a quick sale.
3. With not so great credit & not so great tax returns on a not so great property, they’d be lucky to get and 80% LTV loan… so the investor would need to come up with 20% ($10,000) plus repair costs ($15,000) plus closing costs. 4. With the appraisal review & secondary underwriting review because of the odd scenario they’d be lucky to go to closing before they start collecting social security.

A traditional mortgage puts the investor into the deal for somewhere around $30,000.

Why??? The investor is getting a great deal. With a portfolio lender that’s friendly to investors the following will probably happen:

1. Most investor loans need a very quick closing. 2-3 weeks max.
2. No pre-payment penalty.
3. He’ll get a loan for up to 65% of the After Repaired Vale (ARV). That will cover 100% of the purchase and 100% of the repair costs. He’ll just need closing costs

With investor friendly lending, it opens the door wide open for all legitimate real estate investors to make money the American way.

Ari Miller is Vice President of Gelt Financial Corporation, a private portfolio lender specializing in small commercial and investor rehab mortgages. Gelt lends in PA, NJ, DE, MD, FL & NY. You can contact Ari at (215) 357-4955 ext. 275 or AriMiller@GeltFinancial.com. To learn more about Gelt Financial, go to their website www.geltfinancial.com