Diane Grove

Loan Considerations for Fix & Flip / Short-Term Investors Securing conventional financing on a fix & flip or short-term loan is not recommended. Most conventional lenders sell off their mortgages to investors on the secondary market. If the loan is paid off early (before six payments are made), the investor has not recovered their initial investment. The investor will attempt to recover their loss from the lender, who will ultimately come after the loan originator. The loan originator would then be obligated to pay back any premium paid out by the lender. If such activity becomes habitual with the loan officer, the lender can cease doing business with them and their firm. Furthermore, conventional loans require conventional appraisals. The lender will require that the home is a) habitable in its present state b) in at least ‘average’ condition and c) not in need of any repairs greater than 2% of the purchase price. All three points can be challenging to overcome for investments properties, especially bank owned homes. Consequently, many investors use private money, hard money, home equity lines of credit, cash or specialty investment lenders to avoid failing a conventional appraisal. All of the aforementioned sources of funds can be worthwhile to pursue, but they are meant for short-term loans. Hence, the borrower needs to have a clear exit strategy(ies) to avoid costly extension fees and holding costs. Such loans carry higher interest rates and up-front fees due to their considerable risk. They can be a great route to pursue; however, the investor better be prepared in case the home is not able to sell. Fix & flip investors should also be cognizant of title seasoning issues. FHA guidelines require that a seller be on title for 90 days before a buyer can purchase the home with an FHA loan. Most flips take longer than 90 days to renovate, market and actually close. But, some deals need limited work and can be turned around quickly. Ultimately, you will want to verify that the new buyer’s lender understands the title guidelines of the lender being used. Furthermore, a flip investor is going to list the remodeled home for significantly higher than what they had paid for it. The lender providing financing to the buyer purchasing the renovated home will scrutinize the new appraisal to ensure the value is justified. Lenders got burned in the past on property flipping schemes and are wary of substantial value increases in short periods of time.

What is a FICO score?

FICO stands for Fair Isaac Corporation, a company that created the most used credit scoring model in the United States. An individual’s credit score is calculated through a statistical algorithm and is used as a factor in determining the likelihood of a borrower defaulting on a loan. FICO scores are generally used for obtaining mortgages, car loans or consumer credit. The scores are provided from the three major credit reporting agencies: Equifax, Experian and Transunion. Typically, there is a variance amongst the scores since each agency has a slightly different scoring formula. FICO scores range from 300 – 850, with higher scores being considered less risky. For mortgage lending purposes, any score over a 680 is considered good and above a 750 is considered excellent. Any score below 580 is considered great risk and will be challenging for such a borrower to secure financing.

The factors that contribute to a FICO score and the weighted percentages for each are as follows:

• 35% — timeliness of payments (adverse dings to scores for any payment greater than 30 days later, collections, past due accounts)
• 30% — the ratio of used debt to allowable debt for consumer credit (an individual that maxes out their credit cards will see a decrease in their score)
• 15% — length of credit history (the more credit history and showing proof of consistent timely payment, the better the score)
• 10% — types of credit used (installment, revolving, mortgage)
• 10% — recent credit inquiries and recent new credit (taking out a fair amount of new credit with multiple credit inquires can adversely impact a score)
  

TOPIC: Improving conditions in Denver’s market

There are some signs of strengthening in our Denver market. The metro area's inventory of available resale housing decreased 20% to 23,120 units in October from October 2007. Some of this reduced inventory is attributed to homeowners taking their properties off the market in frustration because their property is not selling, but lower inventory implies a strengthening market. Remember, the Denver area had housing inventory of 31,989 units in July 2006. Home sales rose 14% to 4,265 in September compared to the same month last year. This is due almost entirely to the lower-end of the market (under $180K) selling like hotcakes. October's median selling price for single-family homes decreased 12% to $206,000 from the same month of '07, and was down 4.7% from September's median of $216,150. Median selling price for single-family homes dropped 10.5% to $222,000 through October, from $248,000 through October '07.Prices are still falling, but at a slowing pace. This trend should continue into 2009 when it is expected to bottom out and slowly climb back. Hang on, it's gonna continue to be a wild ride!

Recap of First Half 2008 Home Price Performance
By Lon Welsh and Terry Wenze, Your Castle Real Estate.

The average home price in Metro Denver increased +2% in the full year 2005 to the full year 2006. Comparing 2006 to 2007, the average home price across the metro dropped 3%, to $303,000. The half of 2008 was $275,000 vs. the first half of 2007 was $306,000: a 10% decrease. These numbers will be slightly different than Metrolist, as they are just Denver Metro and don't include outlying areas like Fort Collins, Colorado Springs, or Boulder.

The average price of a foreclosure dropped -6% to $168,000 in the first half of 2008. The average short sale was steady at $212,000. The average price of a non-distress sale decreased 5% to $352,000. Sales volume was down for single family homes. Foreclosure and short sale volume is up and non-distress seller volume is down.

Some areas did better than others. The attached chart shows different neighborhoods in our region. Each region has the neighborhood's name and the percentage of sales in the last twelve months that were either short sales or bank-owned properties. The second line has the price change the twelve months from July 2007 to June 2008 vs. the twelve months immediately preceding. Next, you'll see the average home price in the last twelve months and the average days on market (DOM) in the last twelve months.

There had to be at least twenty sales in the last year for an area to be included. The numbers are more reliable in areas where there were more sales.

The good news is the last four times the market had a change from a buyers market to a sellers market, or vice versa, it was preceded by a change in the DOM. DOM for homes declined in the first and second quarters of this year. Too soon to call it a trend, but it is a favorable sign. Another great indication of hitting the bottom: monthly prices in DSW and AUN have been relatively steady for seven months, after falling rapidly from 2005 to 2007.


Source: Your Castle Real Estate analysis, MLS data

Question or need more detail? Call Lon Welsh at 303 619 0633 or LonWelsh@YourCastle.org

(c) Copyright 2008 Your Castle Real Estate

If you have not heard already, the inventory of home on the market in Denver has been declining. This is not true in many regions of the county. Your clients, who often only see national headlines, might not be aware of this favorable news. Our market has some unusual factors at work. Let's explore them, so you can better help your clients.

If you look at the first chart (MOI 1), you'll see the MOI (months of inventory) for Denver's suburbs on the bottom axis and the average sales price in that suburb on the axis on the left side. Denver metro currently has about six months of inventory (a balanced market, on average), but you can see there is a lot of variety from one city to the next. Lower cost areas, such as Thornton, are seeing inventory move fast. Sellers (mainly banks) don't have to wait long for offers. Thornton's average price in the last year was around $250,000 and the average MOI was about 3 months. Greenwood Village, on the other end of the scale, had about 13 MOI and an average price of about $1.4 million. Sellers are suffering there. The city of Denver is about in the middle.

If you look at the second chart (MOI 2), you'll see the MOI information sorted by the price of the home. In some cases, this might be more useful when you meet with clients. The city of Denver, for example, has many neighborhoods with homes under $100,000, and they are selling fast. On the other hand, upscale neighborhoods like Cherry Creek and Hilltop have significant levels of inventory and it's taking a long time to get homes sold, especially over the $1 million price barrier.

The left part of the chart show what percent of the active listings are REO (in red) and which are regular sellers (in green). For homes priced between $0 and $100K, regular (e.g.,, non-bank) sellers are 17% of the active inventory, but only 12% of the sales in the last twelve months. You can see on the left that since they are not getting their "fair share" of the sales, the MOI for the regular sellers under $100K is 2.7 months. For REO under $100K, it's a blazing 1.9 months. This probably isn't a surprise to any Realtor that has written an offer for a low priced REO and the listing agent has told them their buyer is competing with ten other offers. It's a strong seller's market at this price point!

Compare the homes from $480K to $1MM. Here, MOI is around 14 months - a very slow market. Your seller's experience with marketing time depends greatly on their price. I hope this information will help you demystify our market for your clients.