I see many new investors making this mistake on fix and flips.
If you are buying a property to fix and flip then you need to have a firm understanding of who you are selling your house to. On lower priced properties and entry level starter homes your buyers will typically be FHA Buyers. The reason for this is because FHA Loans are the easiest to get approval for. They also require the least amount of a down payment (only 3 1/2 percent). So FHA loans are very good for first time home buyers.
So if you are planning on selling your house to an FHA buyer, then it would benefit you to understand how the FHA loan works and what your typical FHA buyer looks like. It would also be necessary for you to understand FHA Loan Limits.
The most critical thing for you to know is the FHA Loan Limit for the County that you plan on flipping in. For example in Florida, the FHA loan limit for Palm Beach County, Miami Dade County and Broward County for a single family home is $345,000. In St Lucie County and Martin County, the FHA loan limit is $316,250. In Brevard County the FHA Loan limit is only $275,665.
Why is this important to you as an investor?
Because if you are looking to fix and flip houses, then on a a house BELOW these price points, your buyer will probably be an FHA Buyer. If you are trying to resell your home above the FHA loan limit then you have automatically eliminated all FHA Buyers.
Since conventional mortgages are much harder to get approval for and require a 20% down payment many buyers simply don’t have the credit rating or down payment to qualify. However some of these buyers do qualify for an FHA Loan. So if you want a good product to fix and flip, then you should fix and flip to first time home buyers who are purchasing with FHA loans.
Why?
Because there are many entry level starter homes available as bank owned properties. Most of these houses can be fixed and sold relatively easily for a good profit margin. And since there is a shortage of lower priced homes you will find that these houses are very easy to sell.
So understand your FHA buyer and their loan limits. You also need to understand that since they are putting down only 3 1/2 percent they DO NOT have a lot of excess cash lying around. That means you might need to be flexible on closing costs and seller credits. If the house will appraise you may be able to increase the price slightly to offset that.
If you want to fix and flip in volume multiple houses at the same time you are better off staying way below loan limits and going after first time home buyers with FHA Mortgages. These are the hungriest buyers of all. And they are so easy to appease. All you have to do is remodel the home and make it look brand new and you should have no problem finding a buyer quickly.
When you sell way below loan limits in the lower price points then you are not competing with home builders, or with inventory from conventional sellers. This is so huge and so few sellers understand this. There is a ton of inventory as you move up the pipeline in price. The scarcity of inventory is at the lower price points. And since there are so few low priced homes listed for sale, if you make your fix and flip brand new inside then your property should sell really quickly.
So make sure you understand your buyer, FHA loan limits and who you are selling to. We typically sell most of our houses at 50% of FHA loan limits.
Why? because at that price point many buyers can actually own a home for less than renting a similar home. Unfortunately not enough renters out there know this.
If you want to learn how to fix and flip homes to first time buyers then please visit our Fix and Flip Boot Camp page and sign up to get notified about our next event: Fixing and Flipping Houses Boot Camp
