The Smooth Loan Process #2010-16

The Seller Does Not Own The House I'm Buying

One of my favorite shows on TV is Flip That House. Reality TV is great for watching other people's train wrecks of lives. The show features investors that "fix and flip" houses. In our current real estate market, the flippers are a key component to recovery. Even HUD has realized how important the flippers are to the Real Estate Market by temporarily waiving their anti-flipping rule a few weeks ago (visit my 1/17/10 episode for more info).

Just like everything, there are good flippers and there are bad.

First, the good. An investor goes to the public auction or trustee sale and purchase a foreclosed property well below its market value. The investor remodels, repairs or upgrades the home and sells at the current market value. If it's done well, the investor makes money and the buyer gets a like new home at a fair price. Win-win. As a lender, we have no problem with this because the increase in price to the buyer can be justified and accounted for in the improvements that have been done to the property.

Another example is the investor that purchase the property as a short sale. The investor finds an owner who is underwater on his mortgage. The investor helps negotiate the short sale below market value with the sellers mortgage company. While the short sale is being negotiated, the investor markets the property for sale to another buyer at market value. The investor uses his own money to complete the short sale, then gets his money back along with his profit when the buyer closes. In this example, the investor is marketing the property and probably has a contract to sell before he owns it. Normally, we would not like this. After all, you cant sell something you don't own. But if it's done properly, the contract with the buyer will not be executable until the investor closes on the initial transaction. The seller sells the house rather than going to foreclosure, the investor makes a profit, and the buyer gets the home at a fair price. Win-win-win. Well, sort of a win to the seller. He would still have to deal with a short sale on his credit.

Now the bad. An investor that purchases a property at market value and does very little or no improvements to the property and sells it at a higher price. Lenders will have a problem with that. An increase in price has to be justified for us to lend on it.

Or the short sale investor that uses his buyer's loan proceeds to pay off the original seller. Lenders are not okay with this. Purchase mortgages can only be used for the purchase of the home. If the investor tries to use the buyer's money to close on his transaction, then not only are we financing the price of the home, we are also financing the investors closing costs and profit. That's not acceptable to a lender. The house is the collateral for the loan. Not the investor profit and costs.

The Smooth Loan Process lesson for today: Make sure the seller owns the house you are purchasing before you go to closing.

Harold Perkins
Galaxy Lending Group, LLC
602-595-1233
Harold@HaroldPerkins.com