BiggerPockets

I wanted to ask another question regarding the financing, since that seems to be a stumbling block for many on rehabs and flips, unless you have your own cash. Please select from the following list. We have to have a sample term, so for this exercise, it is 12 months or less.

A. I won't pay over 10% interset and no points
B. I'd pay up to 15% interest and no points
C. I'd pay up to 15% interest and up to 5 points
D. I'd pay 15-20% interest and up to 5 points
E. I want to pay no interest and share profits at some %.
F. If I plan to make enough on deal, there is no limit to interest %

After I receive enough replies, I'll share with some thoughts from personal experiences. It might prove helpful to you in your business. Thanks again for your replies. Rich
p.s. I think it will be interesting to all , what the differences are and ...........(my teaser)

geez, bill...just pick a letter ;)

B

F......I like to cover my bases.

Have not used hard $ before.

I'm assuming this is for a quick rehab / very short term loan, so the points are probably a bigger chunk than the interest will be...

I am in the F camp, as long as there is profit room in the deal the cost of the funds are negotiable. You did not mention: market rate. In California, there are quite a few lenders and they all charge within 3-4% of each other, so they have set the market price here.

First, my answer: I'm willing to pay 1.5% in points upfront and 7% interest only. I have two lenders that provide financing like this or better (plus I can use my own cash, if necessary), so at this point, I wouldn't consider anything more.

Second, I could be wrong, but it sounds like you're looking to expand into the lending-for-rehabs business (and there's probably a ton of opportunity in that business!), and want to get an idea what typical rehabbers are willing to spend for financing...

If that's the case, here's something to consider:

In my experience, the less experience a rehabber has, the more he or she is willing to pay in loan fees (points and interest). But, this lack of experience generally translates to a much higher risk profile for that investor as well.

In other words, if you find someone willing to pay 5 points and 25% interest, it's probably a safe bet that it's a risky investment (not that it's necessarily a bad investment, just risky).

There are two reasons for this:

1. Experienced investors usually have enough financing options that they don't need to pay exorbitant rates. They've built relationships with lenders/partners and if they've been successful, the money has "found them."

2. In my experience, most investors who are willing to accept high interest rates (and lots of points) haven't done a very good job of analyzing how the deal will be affected by the high costs of financing, and when they're in the middle of the project and realize that they're spread much more thin than they thought, they start to cut corners. This snowballs into a situation where they turn out a product that doesn't sell quickly, and the high monthly debt service erodes their profit. Before they know it, they're upside down, and the lender has inherited a property, not a loan payoff.

So, while exorbitant rates might seem like the preferred way to go, you may find that targeting experienced flippers and receiving more modest returns (but still good returns) is actually a better business model than specifically targeting very high returns.

Again, just my assumption of what you're considering and my experience. Ignore all that if I'm off-base in my assumption...

I pay 2 pts, 15% usually. Not a big deal as it sells within 120 days.

Usually some combination of that, equaling 17% (3 pts, 14% or 4pts 13% etc)

B. I'd pay up to 15% interest and no points

or

E. I want to pay no interest and share profits at some %.

I think I would fall into the A or B category
Chris

C