What Is A Flip?

If you are a first time home buyer or home buyer, a flip is when a home buyer purchases a property with the intention of re-selling it within a year after the home purchase.  Most real estate investors who purchase a property with the intention of flipping it within 12 months normally purchase foreclosures or REO’s where is in need of repairs.  They normally purchase it with cash or a line of credit and their goal is to spend as little money as they can and sell it for the most that they can.  Home buyers who are buying a home that the seller is flipping need to make sure of certain things to make sure that their home purchase will close.  Nothing is wrong with buying a flip, however, mortgage lenders will scrutinize a home purchase that has been a flipped within the past 12 months.

Buying A Property Flip

Property flips used to be very common prior to the 2008 real estate and credit collapse.  Prior to the real estate meltdown, real estate values have increased year after year, sometimes double digits and many folks with no real estate experience became novice real estate investors and whatever property they purchased increased in property value.  These novice real estate investors made money just purchasing a home and selling it months later at a good profit.  They had multiple bids on their property, sold them, and continued the process.  Then the major real estate crash of 2008 happened and real estate prices have plummeted.  Real estate values have now stabilized and home flippers are back.  Since there are thousands of foreclosures and REO’s on the market, home flippers are purchasing these homes at bargain basement prices and re-selling them within a year for a good profit.  Mortgage lenders are aware of this and the government have implemented mortgage lending regulations concerning flips.  Home flippers will purchase a home via foreclosure, sheriff’s sale, or REO and remodel the home and list it back on the market.  Nothing is wrong with this but if you are a home buyer and your home purchase is a flip, you need to make sure you will run into some obstacles on a home purchase that is a flip.

Two Appraisals Are Required On Flips

If you are buying a flip, the mortgage lender will require a HUD from the seller of the property and will review the original purchase price of the flip and the selling price.  If the subject property is being sold for a large profit, two appraisals will be required to make sure the value of the home purchase is justified.  If extensive work has been done, the mortgage lender will require proper building permits was pulled.  A home inspection may be required also from the mortgage lender.  The mortgage lender will probably require an itemized list of all work that has been performed with the property.

Obstacles With Flips Where The Deal Does Not Close

Many property flippers do major renovations to the property without pulling the proper building permits, including additions.  The appraisal review department of the mortgage lender for the home buyer will review the original square footage of the subject flipped property from the county Assessor’s Office and compare it to the two appraisals.  If there are square footage discrepancies in the square footage from the original square footage from the county Assessor’s Office and the two appraisal reports, the mortgage lender will want to see why and most likely assume there was an addition done to the subject property.  The mortgage lender will want to see that the proper building permits were pulled.  If there were no building permits pulled and an illegal addition was done, then the seller of the flipped property will need to correct this problem by pulling the proper building permits.  This can cause major delays in closing on the home purchase or it may kill the deal altogether.

When you are buying a home that has been totally remodeled and is a property flip from the seller, make sure that proper building permits were pulled and anticipate two appraisals prior to you getting a clear to close and closing on your home purchase.

Gustan Cho

www.gustancho.com

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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