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Forums » Rehabbing and House Flipping » First time investor needs advice

First time investor needs advice

29 posts by 17 users

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Rehabber · nashua , nh


Glad I found this site. My name is Steve and I am 32 years old. I currently own a wholesale company for autos and powersports. I am looking to get into home flipping. I have a contractor buddy who approached me with the idea.

Heres the facts.

I am the investor (money guy) Cash in hand. Going to finance all the house and repairs from my own pocket.

He has a small construction company and is somewhat slow on work at the time. Himself, part time brother and friend that work for him.

What he proposed is this. I buy the house. I buy the materials. I pay his guys unmarked up salary (1100 per guy which is $2200 a week for both workers) plus $800 a week for him. Thats $3000 a week for him and his 2 guys to work on the house that I would pay weekly at the end of the week. In the end we do a 70 / 30 profit split the larger portion me.

Ideally I am looking for someone to take the risk with me. In this scenario he assumes no risk. They get paid and if the house doesent sell its me holding the bag or taking a loss.

Ideally I would like to find a contractor who will do the work and take a share in the end. That keeps more money in my pocket and gives me a larger buffer for a safe zone. If it all goes wrong well at least we both lost something not just me. He cant afford to front the guys money and not make money until the house sells so he wants the weekly money.

Whats my money worth? Should I charge to bring it to the table?

He wants to get total junks for like 100k and fix them and remarket them for 190k. I more or less want to buy properties for 150k+ that need paint and trim and do them myself stuff that someone lost but didnt thrash or maybe someone ran out of time and the bank took it and sell them for $190k I would make less money but wouldnt have to split it. These are just examples not exact figures you get the idea

I am a handy person. Like I said I repair vehicles, boats and such so I am very hands on and very capable. I also have construction equiptment that I own myself (bobcat and excavator) that I could do yard work with or septic work etc.

Please tell me your thoughts. I am tossing the idea of doing business with him or also the idea of doing it myself. Please let me know what you think is fair and has worked for you in the past as far as a profit share in this kind of scenario. Thanks in advance.



Real Estate Investor · Lake Mary, Florida


err this guy wants his cake and eat it too.... it seems all he will be doing is GC.... which unless he is the best contractor ever, doesnt mean much... i mean you even said he is slow to work sometimes. which is not good at all.

tell him is he is serious he should put his own money in, if he cant, then have him bring you deals. if he can bring you good deals than use your cash to finance the deal, pay for materials only and when the house sells give him 30% after splitting all the rehab costs with him.

i havent done my first deal yet. but i have been burned in the past with partners with no equity. my suggestion is to stay away, unless he does truly bring you some good deals. then work with him. he needs you to fund the deal as much as you need him to get the house ready.



Real Estate Investor · Lake Mary, Florida


oh and one other thing, i just finished completly reading your post hahah... sorry that first part gave me some flash backs....

As for the deals you choose to get, this is a business, you have to make numbers work. and with the economy the way it is, make them conservative. if those numbers work, the job will be done. dont stress if its a total rehab or just a simple paint job. just make sure its done on time haha



Commercial Real Estate Broker · Canton, Georgia


Steve with friends like that who needs enemies !

That is about the worst deal I have ever heard of in my life !

So he wants you to buy the place,pay for parts,shell out 3,000 a week in labor,and then get 30%.

No wonder this guys business is slow.His financial problems are not yours. As far as finding property with carpet and paint only it will be tough as home buyers compete for those properties too.The home buyers are happy to live in it and get small equity say 10k where you can't do that on your flip plus it's easy for them to get a loan to purchase a property with minimal work.

With cash you need to look at properties needing a bunch of work.Try to find the most run down property in a great area.Buy it cheap for cash and fix it up to sell.

If you don't want to take yourself away from your main business you already have you might look at wholesaling properties to start.Less risk just getting started and you can learn the ropes.

You can use hard money for flips to preserve cash but the hard money takes high interest and points and only gives money for repairs in draw schedules so it drags out your rehab and resale which costs more money with your loan.

You could focus instead of whole tailing.Fix the property us some and sell to an investor for cash with a small markup.Since they have cash there will be no loan red tape with a retail buyer.Less margins but more volume.

Hope it helps.


Small_allworldrealtyJoel Owens, All World Realty
E-Mail: [email protected]
Telephone: 678-779-2798
Website: http://www.AWcommercial.com
www.AWcommercial.com 678-779-2798 [email protected]


Rehabber · Hyattsville , Maryland


It seems to me that the deal should sound more like 100/0. You are buying the house, the materials and paying the guys. Why can't you do the exact same minus your "friend". I know some workers who seem to think my gas is free but they have to go to the gas station and pay for thiers by that I mean your money is free and you can afford to do all that for 70% meanwhile they cannot afford to go without a paycheck and they still deserve 30%.

What is to stop them from dragging out a 4 week project into 8 weeks afterall they get paid for thier work and once the project is over they don't get paid till the house sells. It sounds like a bad deal in general. I could maybe understand you putting up money to buy the house and materials and then splitting 70/30 but to pay them as well is adding insult to injury.



SFR Investor · Wheat Ridge, Colorado


I'm with the others. The guy wants to get paid and paid weekly and wants to get a share of the profit? No way. He's simply the general contractor (licensed, I assume). He gets paid as such.

Have him bid the entire job. And get at least two other sets of bids. A small up front payment ($0 would be good), then progress payments as the work progresses. Hourly rates are guaranteed to cause you problems.

Now a "money partner" arrangement isn't unusual. That's where the rehabber finds the house, gets all the work done, and then sells the house. The rehabber does ALL the work. The money partner puts in ALL the money. The rehabber DOES NOT get paid anything until the house sells, and does not get paid for his labor at all. If he hires subs, they can get paid. A typical split would be 50/50 of the net proceeds.

Alternatively, the money partner could just do it as a loan. The rehabber buys the house using money from the money guy. As the work progresses, the rehabber gets draws from the money guy to reimburse him for the work that has been completed. Once the house sells, the money partner gets paid off. The rehabber keeps the difference, or makes up the shortage if the deal goes south. If the deal really goes south, the money partner takes back the house.

A rule of thumb is that if the purchase and rehab costs are 70% of your eventual selling price, the profit will be 10-15% of that selling price. That assume six months of money borrowed at hard money rates, which would cost about 7% of the selling price (assumes 4 points, 15% interest only, and a loan of 70% of the selling price.) So, neglecting the money costs, you're looking at a profit of 20% of $190K, assuming you can buy and rehab for $133K. That's about $38K profit. If you buy for $150 and spent $5K on lipstick, you've just given up $22K of your $38K profit, leaving only about $16K. If you want to do deals like that, you really don't need your friend. But, as Joel explains, you'll probably have better luck with houses that need more extensive work.


Jon Holdman, Flying Phoenix LLC


Real Estate Investor · Ellicott City, Maryland


Agreed with all the responses above. A couple other things to consider:

- He's a contractor who is slow. This says something about either him, his business, his skills, or a combination of those. While even the best contractors have down periods of time, the good ones are rarely slow for long periods of time;

- His guys are getting $1100 per week? At 40 hours per week, that's $27.50/hour. They better be licensed, insured and VERY skilled labor to be earning that. Are they?

- Speaking of the above, is this guy and his crew insured? Are they licensed GCs and can they pull permits?

- They want to buy $100K junkers that will resell for $190K. In my experience, to make a reasonable profit on this type of deal, you'd be able to put in no more than about $40K in rehab to make the numbers work. I'm not sure you can turn a $100K junker in a $200K retail property for $40K, even with labor at cost.


Small_lishproplogoJ Scott, Lish Properties, LLC
E-Mail: [email protected]
Telephone: 770-906-6358
Website: http://www.123flip.com
CHECK OUT MY BIGGERPOCKETS BOOKS: http://www.biggerpockets.com/flippingbook


Rehabber · Santa Clarita, California


I concur with all the others. You need to slap this guy or pour a bucket of water over him, he is DREAMING!

Why not just have him bid each job and pay him for the construction work? You keep 100% of the profits and he gets some work! Win, Win.

As to your comment of wanting to go after the deals that just need paint, carpet, etc., be advised that these deals are often not deals at all (if on the MLS) as they qualify for end buyers to purchase them. These buyers are willing to pay full list price at times and also at retail price points, which drive the price up. An investor just can't compete with an end buyer.

As such, I recommend you go after the deals that have something wrong with them that make the property not financeable for conventional or FHA financing. (Example would be a gutted kitchen or a home without a furnace) These deals can only be purchased by an investor and limit the competition. You will often find the best deals on the MLS that are these types of properties.


Small_be_logoWill Barnard, Barnard Enterprises, Inc.
E-Mail: [email protected]
Website: http://www.barnardenterprises.com
http://www.InvestorExperts.com


Rehabber · Chandler, Arizona


Steve

I agree with most of what was said above. Your contractor buddy is not doing anything that is worthwhile for you. The person you need is the one who finds the deals. They are the ones who are going to make you money. Hiring a good crew is fairly simple, but finding the deals is the hard part.

I do what Jon said above. 50/50 splits with my JV partners but I do all the work. I find the deals, manage the remodel, and I sell the property. I have skin the game as well on each of my deals.


Small_rezamp_buscard_whiteJustin S., Rezamp, LLC
E-Mail: [email protected]
Telephone: 4806780446
Website: http://www.rezamp.com
Comp like the MLS. Real-time feed and instant notifications of deals. Rezamp.com


Rehabber · Atlanta, Georgia


Everything that has been said about the numbers is true. They don't work out for you. There's nothing else that needs to be said.

Let me address something else about this - your contractor 'buddy' is trying to set you up with a deal that is heavily in his favor, with an open-ended contract that will pay him in perpetuity on a weekly basis... with the kind of rates I'd expect to pay only for highly-skilled Ninja bosses each with their own crew to run. Maybe labor costs different in Atlanta, though.

Anyway, my point is this - don't work with someone that you aren't wholly, 100% willing and able to fire at the end of the day. A contractor 'buddy' setting you up like that is someone you will have to fire eventually, and it will get ugly when you do it.

I'd go even further and say that trying to renegotiate his terms will be a waste of your time. He won't like it and he won't give you his best work if you try to make him work for more reasonable terms.

Best idea: find another contractor to work with and evaluate him like any other employee. Dealing with your contractor 'buddy' is going to bring you never-ending pain and sorrow... and a lot of lost profit.



Real Estate Investor · Port Colborne, Ontario


We have been rehabbing for 8 years. We borrow private money at 8-10% to do our rehabs. We borrow up to 75% of ARV, but often don't go over 70%. We take 1-4 months to rehab and the majority of our homes are sold within the first six months.

You could if you have the funds and some understanding of the process do everything yourself ...be a general contractor and cash in on the sale. Above all else DO YOUR MATH!!! Make sure you cover everything including the not so obvious. There is no reason you can't do this on your own. Follow all the advise on hiring a contractor. Go see thier work and make sure they are insured.



Real Estate Investor · ..., Michigan


worst friend ever!



Rehabber · nashua , nh


Wow thanks for the ton of responses. All great information. Its tough because I dont know anyone around here that does this successfully to learn from. Glad I found this site.

Having this be my first time I wasnt sure what to expect as far as a split. But upon further review its clear that I need someone to take the risk with me. We win together, we lose together.

In the above scenario I never felt comfortable with him getting paid weekly. Especially since I have to wait to get paid in the end. Worst case scenario if all does not go well he walks away with a paycheck while I walk away losing money, interest on that money I could have had, time, and sanity!

Now If I was to borrow the money from a hard money guy then I guess this deal might be more worth considering. If the house didnt work out for whatever reason it wasnt my money that was lost and I was only losing a minimal amount which would make it worth the risk of trying.

As far as his business info. He is a registered business that does construction and building. He has liability insurance. He said that his guys are covered under that. NH requires a licensed plumber and electrician. But has no other liscensing stipulations on who can remodel or build. He said that since I am the homeowner I would pull the permits to do the renovations.

At $3000 a week I could def hire a couple qualified guys and supervise them myself with no profit share in the end.

So back to the drawing board. Someone mentioned wholesaling. I may look into this. Another person mentioned buying the houses that arnt approvable for conventional or FHA loans and prepping so that they would be approvable.



Rehabber · Santa Clarita, California


Now that you are on our page, the next step is building your team and finding the right deal. To find the right deal, you must know the numbers of a good deal. So learn all there is regarding exit values, rehab costs, selling costs, and holding costs. Without knowing them, you have no way of knowing what to pay for any one property.


Small_be_logoWill Barnard, Barnard Enterprises, Inc.
E-Mail: [email protected]
Website: http://www.barnardenterprises.com
http://www.InvestorExperts.com


Real Estate Investor · Springfield, Missouri


You might drink beer with the guy but he is not your friend in business!

You need to know the business before you get in it, you can't rely on others with your investments.

As others have said...I'd talk to him about going in a blowing it out, for X dollars, you buy it, hire him at a heck of a deal, he HAS A TIME LIMIT, you list it and sell it. That's clean.

Trying to get a contractor to work "when he can" will be a disaster, because later on he will get busy with better paying jobs.

I'd have him find them, inspect them, provide a bid, you pay his costs of labor and you both get your profits when it sells. That will give him some motivavtion to get r done.

Lots of ways to partner, best was is not to!


Financexaminer@real estate investor dot com


Rehabber · nashua , nh


Ok so was talking with the gf tonight we def agree with everyone here. As far as the plan goes right now I am attending some auctions in my area to get an idea of what properties sell for as well as checking out lots of houses on mls in the same area to better my idea on pricing. Met up with a real estate guy who flips houses on the side. Made a handshake deal with him I would use him to list a property when it sells in return he will help me find something that the numbers work. Hes finding me comps on all the auction properties before I go so I feel like I am off to a better start. I am looking for something that is not financeable (sp?) through a conventional loan.

As far as the repairs I think I am just going to make them myself. I know a few people who also renovate houses and they turned me on to some cheap guys who they said were good and work was slow. So I am building my contacts at the moment. Before I buy I want to spend the next few weeks making contacts and learning property values inside and out.

As far as construction and repair costs what do you guys recommend me to do. Learn them or have bids put in to me before I make the offer where possible.



Hard Money Lender · Tyngsboro, Massachusetts


Steve, I live in Nashua. NH has no licensing for GC's, I think you figured that out.

I'll chime in with agreement with all the others, this buddy is no buddy of yours. I get calls all the time from contractors who want to partner with me and all they want to do is function as a contractor. Most of them don't understand that the skill is not in contracting,the skill is in finding, evaluating, deciding how much rehab to do, evaluating the ARV, and getting it sold.

I know lots of people who, when they decide they don't have the time to find and manage deals, simply decide to lend. That's another option you could consider.


Small_small_logoAnn Bellamy, Buy Now, LLC
Telephone: 800-418-0081
Website: http://www.buynowhardmoney.com
Hard money lending in NH and MA, and for free networking in MA, http://www.BlackDiamondREI.com


Real Estate Investor · Ellicott City, Maryland


Originally posted by Steve S.:
Met up with a real estate guy who flips houses on the side. Made a handshake deal with him I would use him to list a property when it sells in return he will help me find something that the numbers work.

Okay, I'm just going throw out something that you might want to keep in the back of your mind here...

I work with a lot of investors, and there two investors who I do everything from being their buyers agent, managing their rehabs, staging, and being their listing agent. But, as a rehabber myself, it is very rare that I will find deals for these investors (there's only one I'll find deals for, and that's because I'm good friends with him).

The reason for this is that because I'm a rehabber, I have little incentive to pass on deals to other investors -- basically, I'm giving them deals instead of doing them myself. Any time a rehabber passes you a deal instead of doing it himself, you need to ask yourself why he would do that? The most likely response is that it's not a great deal...he'd rather you take the risk while he get the commission and doesn't need to worry about the deal being a bad one.

So, just be wary any time a rehabbed says, "here's a deal for you that I'm not doing myself."


Small_lishproplogoJ Scott, Lish Properties, LLC
E-Mail: [email protected]
Telephone: 770-906-6358
Website: http://www.123flip.com
CHECK OUT MY BIGGERPOCKETS BOOKS: http://www.biggerpockets.com/flippingbook


Real Estate Investor · Little Rock, Arkansas


Originally posted by Bill Gulley:

Lots of ways to partner, best was is not to!

Good Advice Bill!!

Steve, Back in the '70s and '80s, it was always easier for me to find a way to make money than it was my buddies. I don't have a single one left now because of our failed partnerships similar to the one you have mentioned here. I learned that you don't ever, ever ever, enter into a partnership with someone else's knowledge and your money. I always lost.
Someone else said the knowledge here is in the deal not the rehab. If I could ever get that to sink in to my own hardhead....
Don



Hard Money Lender · Tyngsboro, Massachusetts


Originally posted by @J Scott:
Originally posted by @Steve S.:
Met up with a real estate guy who flips houses on the side. Made a handshake deal with him I would use him to list a property when it sells in return he will help me find something that the numbers work.

Okay, I'm just going throw out something that you might want to keep in the back of your mind here...

I work with a lot of investors, and there two investors who I do everything from being their buyers agent, managing their rehabs, staging, and being their listing agent. But, as a rehabber myself, it is very rare that I will find deals for these investors (there's only one I'll find deals for, and that's because I'm good friends with him).

The reason for this is that because I'm a rehabber, I have little incentive to pass on deals to other investors -- basically, I'm giving them deals instead of doing them myself. Any time a rehabber passes you a deal instead of doing it himself, you need to ask yourself why he would do that? The most likely response is that it's not a great deal...he'd rather you take the risk while he get the commission and doesn't need to worry about the deal being a bad one.

So, just be wary any time a rehabbed says, "here's a deal for you that I'm not doing myself."

J Scott, you are on the money. The exception to that might be if the rehabber who is wholesaling the deal is over-extended, either financially or time-wise.

Another point for you, Steve S., is that a realtor who is looking for a commission when you sell, is also likely to overstate the ARV when he brings you a deal to buy. I talk to newbie investors every day who call me with a deal they want me to fund, and state the ARV of the property according to their realtor. 99% of the time it is overstated, and the newbie investor vehemently defends the realtor. Until I pull the comps 1/10th mile away that the realtor conveniently skipped over when pulling comps to support the ARV he proposed.

Your guy may not be any of the above, but then again, he may be.


Small_small_logoAnn Bellamy, Buy Now, LLC
Telephone: 800-418-0081
Website: http://www.buynowhardmoney.com
Hard money lending in NH and MA, and for free networking in MA, http://www.BlackDiamondREI.com




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