Combining House Flipping and Mortgage Note Selling

2009 October 22

I get contacted by people rehabilitating houses and selling them (Flipping) quite regularly. They call trying to sell the private mortgage. Sadly, many times I am unable to help them due to a valuation problem. This valuation problem is somewhat the nature of the flipping beast. What I mean by this is how many flippers operate, particularly in the current bottomless housing market.

Allow me to explain. Many flippers go into an depressed area where there are a number of foreclosures and snap one (or more) of these empty usually run down homes. They bring it up to par and then sell it to a qualified buyer utilizing owner financing with typically 10% down. Assuming they truly qualified the buyer, this scenario or strategy works well unless they try to sell the mortgage right away. What happens then is we order an appraisal o Realtor estimate of the value of the home. And while the home has obviously been improved and is in much better condition than surrounding homes the difference in the price the flipper sold the home for and “comparable” homes in the area usually is far too much of a gap to justify the sales price. The result is usually a home that is worth less than the private mortgage. Case in point.

I recently had a flipper who had sold a home to a buyer with 15% down and great credit. It was sold for $46,000. On the surface, this looked like an easy value to obtain. But in reality, there had been a number of sales (many from banks) in the same neighborhood that sold for $20,000, $18,000, $9,000 and even one for $2,900!! Sure most of these homes needed work but not $30,000 to $40,000 worth of renovations.

So the bottom line on flipping (from a private mortgage buyers perspective) is this: Unless you are happy with the cash flow and down payment from the sale/mortgage, don’t flip homes in decimated neighborhoods. Only flip homes in neighborhoods without comparable homes that have been or that are in the process of foreclosing. A tough act right now, I know only too well.

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