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Financing for profitable property flipping

By Jeff Lazerson

3/15/18

What I think: With all of the graveling about low inventory levels and overpriced properties, home flippers are crushing it. Go figure. 

Nationally, 2017 data indicates home flipping sales volume jumped to an 11-year high according to Irvine based Attom Data Solutions.  

“California ranked as the 11th highest flipper state with 6.2 percent of all homes were flipped,” said Daren Blomquist, Attom’s senior vice president. “The second sale of the same property within a 12 month period defines a flip.” 

Fresno led California for the highest number of 2017 flips at 9.6 percent. In southern California, the Riverside-San Bernardino metro area ranked sixth with a per property gross flip profit of 36 percent translating to an average of $79,300. Nice! 

The Los Angeles and Orange County market turned a 2017 gross profit of 32 percent, averaging a doubly-nice gross profit of $135,000. Cha-ching! 

Cash is king.  

Not to worry if you can’t pay cash. Financing is available investors wanting to keep the property or fix and then flip. Fannie Mae has a loan named Homestyle that will provide investor purchase financing and fix-up funds for 1-4 units. 

One interesting loan I came across for those wanting to mansionize a flipper, allows you to put as little as 10 percent down, not to exceed 80 percent of the “as is” property value. For example, you purchase a property for $1 million but it’s worth $1.2 million before improvements. You can go in with $100,000.  

With a cherry on top, the investor will make available as much as 80 percent of the fix-up funds based upon the completed value. Interest rates range from 8 percent to 11 percent and two to four points. 

There are traditional construction loans available but the challenge is all of the red tape to have approved plans, contractor bids, etc., done before the seller gets too impatient with a likely long escrow period. 

Now, if you are looking to buy a recently fixed-up property (you being the flippee), caution ahead!  

Engage an experienced home inspector to dig deep. 

“Fifteen to 20 percent of flipped properties I inspect are not done in a workman like manner,” said Jon Wilhelm of Studio City based Valley Home Inspection Service. 

The biggest problems that Wilhelm sees are shoddy structural modifications like opening up walls, electrical violations and moving roof framing without permits. 

Wilhem estimates that 20 percent of the first contracted buyers to have inspections done on recently flipped properties walk away because the problems are found but the seller is unwilling to fix them. It’s usually the second buyer contract that sticks because the seller now has something on record that can cause liability if undisclosed and or unrepaired. 

It can cost anywhere from $300 to $800 for a property inspection.

If you have questions or comments, please contact Jeff Lazerson by clicking here. For more great insight make sure to check out Jeff Lazerson’s Mortgage Grader Radio Show on Sundays at 10 am on AM830 KLAA.