Why Brokers Don’t Like Property Flippers
A property flipper is someone who aims to make money by buying and selling a property very quickly, usually within 12 to 24 months. If done well, the profits can be quite sizeable and reality TV shows encourage this theory.
In reality, there are just as many flops as there are flips, with some property investors trying to make a quick buck but losing big money instead. There’s more to flipping than donning a hard hat, doing a few DIY cosmetic enhancements and staging it ready to sell.
You have to be market savvy and research things like: local property values, ceiling prices, the costs involved, how you can best add value to the property and if renovating, what aspects of the property you should focus on so it appeals to buyers willing to pay top dollar.
You have to buy the right property to flip in the first place, ideally below market price, and something that doesn’t have a wealth of underlying problems (such as structural issues). In a hot property market finding the perfect property to flip isn’t always easy.
Why Financing a House Flip May Be Difficult
Taking all this into account, an even larger problem may be convincing a bank to take on a mortgage that you want to pay back in a year or less.
Generally speaking, banks are happy to lend against investment properties to borrowers that have a decent deposit, a steady income and a plan to hold onto it at least 5 years, by which time the banks would have collected a hefty sum in interest payments.
However, a flipper is only in it for the short term as they’re interested in buying the property as a flipping project and want to sell it as quickly as possible. So banks tend not to like flippers as they don’t make them enough money in compound interest.
Mortgage brokers have multiple lenders on their panel and could help obtain the finance needed.
Unfortunately for flippers, brokers usually don’t like them either. The problem with flipping, from a broker’s point of view, is that the broker loses twice.
1st Problem Brokers Have With Flipping – Losing the Upfront Fee
Lenders pay brokers through upfront and trailing fees or commissions. That means brokers receive a small piece of the mortgages they broker to their clients.
If a flipper sells the property within 12 months, the upfront fee that the broker received from the chosen lender is usually 100% claw backed, and if the loan is settled between 12-18 months, a 50% claw back usually applies.
Nobody likes working for free.
2nd Problem Brokers Have With Flipping – The Trailer Fee Is Stopped
A trailer fee is compensation paid to a broker as an incentive to keep their clients with that lender and for providing ongoing mortgage advice and services to borrowers. Trailer fees are usually paid monthly.
This fee is paid on top of the once-off upfront fee.
Once the loan settles, the trailing fee stops. So instead of earning this fee for 5,10, 20 years, the broker receives it only for a year or two when dealing with a flipper.
Again, the broker loses out by partnering with a house flipper.
Not surprisingly, because of these two problems brokers usually don’t view flippers as a profitable investment of their time, neither in the short term nor in the long term.
But there are win-win solutions for flippers and brokers. These issues can be solved by various ways. For example, the flipper may reimburse the broker for the upfront clawbacks as they occur. The broker still loses the trailer fee but he’s getting multiple business from the flipper and his upfront fee is overall intact, so usually brokers are happy with that. Other solutions can be negotiated between the parties.
If you’re a property flipper looking for finance options get in touch with Ethan today to discuss your personal circumstances and get an expert’s advice!