A major advantage of becoming a “serial home seller” is you can qualify for owner-occupant mortgage financing from conventional lenders. But a major disadvantage of buying fixer-upper houses is many lenders won’t loan on houses that are in very bad condition.
However, this can become an advantage! Working with a mortgage broker can be advantageous because many lenders will appraise a “fixer house” on both its current market value (your purchase price) and its future value after fix-up is completed. FHA has a loan program for this, but the FHA loan limit is so low in most communities this is not a viable alternative.
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My good friend, Jay DeCima, author of two great books “Investing in Fixer-Uppers” and “Start Small, Profit Big in Real Estate,” explains he buys fixer-uppers with seller-carryback mortgages because most lenders refuse to finance his purchases of run-down properties. This is a great tactic to use to get sellers to finance your purchases without any credit reports, lender hassles, and (best of all) you get to specify the mortgage terms, such as interest rate and length of time.
However, if the seller won’t finance your purchase of a fixer-upper house, then an experienced mortgage broker can be extremely valuable. He or she should have contacts with lenders who will finance owner-occupied fixer-upper houses. Personally, I’ve also had excellent results with community banks that keep their loans in their own portfolios. To finance the cost of the improvements, a home equity credit line is usually the least expensive and easiest to obtain.
A major advantage of using a savvy mortgage broker to obtain financing, especially if you are “cash challenged” and short of down-payment cash, is they can often arrange 100 percent financing if (1) you have a FICO (Fair, Isaac Corp.) credit score of 700 or higher, and (2) good income. Being an owner-occupant gives you a major advantage over non-occupant investors who usually pay higher interest rates and have greater difficulty financing the purchase of fixer-upper houses.
SUMMARY:You can become the envy of your friends and relatives by creating a tax-free business of buying fixer-upper houses, fixing them up, and moving in for at least 24 of the 60 months before selling with up to $250,000 tax-free profits (up to $500,000 for a married couple where both spouses meet the occupancy test and file a joint tax return). This process can be repeated over and over again, without limit, but not more frequently than once every 24 months. The same technique can be used on vacation and second homes that become your principal residence to meet the 24-month ownership and occupancy test. For full details, please consult your personal tax adviser.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
