The Perils Of Buying Flipped Properties In The Real Estate Auction Market

Posted on: 9 September 2020


You have decided to venture into the auction market to try to get the big discount on homes you are always hearing about. In most cases, you will be asked to pay in cash. Yet you do not have to sell gold bars or raid your savings account to gain possession of your new home. Several lending options are available. 

Unfortunately, many inexperienced real estate investors bid for properties at auction without a real estate professional to guide them. If you win the bid for a flipped property, you could find it more difficult to borrow money. 

Flipping and Mortgage Lending 

Flippers are also in the estate auction markets for the deals. They scoop up fixer uppers at a steep discount.  Buyers should be aware that lender restrictions will make it harder to borrow money to buy estate auction properties held for less than a year. 

According to real estate law, a home must be held for 90 days before the seller can sell. However, you should consider any property held for less than five years as a potential flipping event. Real estate investment trusts (REITS), for example, actively buy, fix up, and sell properties within five years. 

FHA Loan and Flipping Rules 

If you have little cash and poor credit, the Federal Housing Authority (FHA) insures higher risk home purchase loans. If you want buy a foreclosed property but have poor credit. an FHA loan is an option to explor. You will still need some cash to cover a down payment and the real estate closing costs. 

If you are eyeing a fix-and-flip foreclosure home, though, the process for obtaining an FHA loan can be stricter. If the seller has owned the home for:

Less than 90 days

The 90-day rule prohibits an FHA lender from providing you a loan for that property. 

91-to-180 days 

If the purchase price is more than 100 percent of the seller's purchase price, or 20 percent with a higher value loan, a second appraisal will be required. 

91-to-365 days

If the resale price is more than 5 percent, a second estate auction appraisal is required. 

Like any real estate purchase, an experienced real estate agent can help you navigate the estate auction process. If you make a bad home purchase at a real estate auction, you could get stuck paying high interest rates to get a loan and with repair costs you did not budget for.