Why Is Home Flipping A Bad Thing

I work in a real estate environment where people write a contract to purchase a home, get a loan for that home and live in that home.  Unfortunately, we’re in a time right now where foreclosures are at their highest level.  Many investors are taking that opportunity and buying foreclosed, short-sale, bank repossessed homes, putting some money into them and re-selling them. There lies one problem: many lenders and insurance companies don’t like that.  I think it came about years ago when flippers began to get a bad name for themselves.  You can see all the different ways to flip a home on any home improvement channel or Internet site.  Some flippers chose to be unethical by putting a band-aid on the house — a fresh coat of paint, perhaps. The buyers then ended up with a home that was unsatisfactory.  That would be difficult to do in today’s market with good home inspectors and appraisers.

It is difficult to understand why lenders and mortgage insurance companies are unwilling to loan on a flipped property. As an example, let’s say I buy a property for $70,000 which is 50% of its appraised value. I then make improvements to the property that cost $20,000. When my realtor runs comparable sales, the home is now able to be marketed for $90,000 to $110,000. What I am hearing is that lenders will not lend on the property because I flipped it for profit. Interesting. You lend money at an interest rate for a profit but someone buys a home, rehabs it, and sells it for a profit and that’s deemed unacceptable.

I’m not sure where all this will end up, but I did read an article the other day which said that the federal government is making changes to the underwriting procedures of the FHA loan. For years, FHA had a policy of not lending on a flip style home, but the government has changed their stance, recognizing that there are many foreclosed properties in the marketplace and that some of them are in less than desirable or less than sellable conditions.  The flip process may now be allowable. This would be a needed change because the way it is now, you need to have owned the home for 12 months before some lenders will let you sell that home for a large profit.

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