Is staying below FHA loan limits a major factor for investors?

[KristopherSD]

I’ve been continuing to save since my last post found below and am looking for a bit more advice: http://piggington.com/would_you_purchase_or_wait_my_position

I find myself in a position where i could conceivably put an offer in on houses priced around $500-525k with 30% ish percent down bringing my loan amount down to a comfortable $350k. This would be for cosmetic fixer-uppers in the La Mesa/Allied Gardens area that likely need $50k+ of work done to them. My question is, do investors tend to avoid homes like the ones I’m mentioning because of the FHA loan limits in San Diego county ($562k for single family)? My thinking is that the margin for an investor to buy and flip one of these homes is so razor thin that they would bump up against the loan limits potentially limiting a large amount of buyers.

My hope would be to buy a place like mentioned above and have it be a long-term home for myself and future family. Speaking with friends also trying to buy places in a lower range $375-475k, it seems investors dominate and buy anything that has flip potential. I’m hoping that going above this range to find a fixer would eliminate many of those flippers. Any thoughts or insight on how big a factor FHA limits and investors are in this range? I greatly appreciated the advice before and it opened my eyes to more possibilities.

Thank you,
Kristopher

[bearishgurl]

KristopherSD, don’t decide to make offers in SD County based upon whether your “competition” (other buyers) are using FHA financing. The FHA programs were never in very wide use here. My area is full of flippers and I can tell you that they look at properties at all price points (well below $1M) if they think there is some profit in it. Sure, they’ll buy a fixer all cash for over $500K if they think they can quickly resell it for $750K but those deals are harder to find than the $300-$425K “bread and butter” house that will sell for $380-$525K). Flippers don’t necessarily sell to FHA buyers and would prefer not to, due to the fact that they often cut corners when doing quick facelifts in an attempt to cover up major flaws (even structural). The last thing flippers want to deal with is an FHA appraiser who is going to reject the property for a myriad of reasons. Just because a property is priced under the San Diego FHA loan limit does NOT mean that FHA is the predominant financing used in a given area or even that ONE seller in that area has accepted an FHA offer in the past several years!

I don’t think the use of FHA financing is very prevalent in La Mesa 91941 (east of Windsor Hill) or at all prevalent in 91942. It might be accepted in a handful of offers per year (3-6?) in the part of 91941 bordering Lemon Grove and SD College area. I believe that the eastern part of 91941 has a very high percentage of all-cash sales (50%+?). The reason is twofold. (1) The housing inventory in 91941 (eastern portion) averages out to over 70 years old and the FHA is particular when it comes to lending on older properties. And, (2) 91941 (eastern) is the most unique area of SD San Diego County, IMO. It has many period homes as well as many custom homes with expansive views situated higher up. This eclectic mix of “character” homes all in one small city can be found nowhere else in the county. Even down in the village, there are several notable “Mills Act” homes and the area (although hot in the summer) is extremely inviting and walkable with lines of 100+ year-old date trees.

In short, sellers in most of LM have much better offers to pick from than those of FHA buyers.

Allied Gardens is a flipper favorite playground due to uniformity of floor plans (fairly easy to predict rehab costs) and having lots of available community services for families (families with children are attracted to it for that reason and its close-in proximity to all SD has to offer). Honestly, it is much cheaper (in loan costs) to get a conventional loan to buy a single family home, the buyer closes much faster and it is a whole lot less headache due to FHA’s extremely high MIPs and the inability to get rid of it easily or timely.

Moderate and lower-income buyers who would have no choice but to buy a home using FHA financing (due to inability to save a reasonable downpayment) would NOT be shopping in La Mesa or Allied Gardens. They would be combing through slim pickings out in Lakeside, El Cajon, SE SD or Spring Valley or up in Riverside County duking it out on nearly every listing with buyers who aren’t using FHA financing.

And if you’re considering a condo/pud, most complexes in SD County have too many rentals in the mix for a unit in the complex to qualify for FHA financing.

In short, for buyers considering making FHA offers in SD County, good luck to them. They might have more luck in the outskirts of Kansas City. If you want to make conventional offers, then go right ahead and don’t worry about what your type of offers your competition is making. You only need to get an accepted offer on ONE property.

Also (in LM especially), if you think you will need $50K for rehab work, budget $100-$150K for sight-unseen surprises. For a fixer in Allied Gardens, budget $50-75K. In either case, plan to do all the work you possibly can yourself and only hire tradespeople when absolutely necessary.

[poorgradstudent]

The Fannie Mae/Freddie Mac conforming loan limit in SD is $546,250. That can theoretically affect the math somewhat.

The fact is there is plenty of competition in the ~400k range for SFH in SD County. We found that once we started looking at homes above $450k, the options got way better than those 400-450k.

Re-reading your past post, while I admire your forward thinking, odds are your potential future wife will hate whatever house you buy now. Especially if you sink $50k into upgrades; one person’s dream kitchen can be a nightmare for someone else.

If you are handy enough to do the work yourself that’s one thing, but I’m not sure you really need or should look to buy a fixer upper at your stage in life. And frankly you’re too young and relatively affluent to live in La Mesa or Allied Gardens right now. There are nice parts of La Mesa, but it’s not exactly a place full of hip young people.

I get that you’re afraid of being priced out forever, but there’s something to be said for you renting for $1,000 a month and putting the additional $1,000 a month you’d be paying towards a mortgage into an investment account. One of the huge advantages you have as an unmarried 26 year old professional is if you get a great job offer in Seattle or San Francisco or Austin you can pick up and move tomorrow. Yes, you can rent out or sell a home if you buy one, but there is an opportunity cost there.

If they were cheaper right now I’d tell you to buy a condo in a “cool” area. Somewhere like PB or Hillcrest or North Park where you could easily rent the place down the road if you outgrow it. Buying a SFH in La Mesa for a primary residence as a young single guy feels like putting the cart before the horse to me.

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