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How to Syndicate House Flips: A Step by Step Guide

by Michael Blank on April 28, 2014 · 18 comments

  
Syndicate House Flips

While I write mostly about apartment building investing and syndication, I want to write today about how to structure deals when you’re raising money for house flips.

It’s a lot simpler to structure and easier to raise the money than for larger apartment building deals.

As with all real estate investing, DO NOT sit on the sidelines because you don’t have any of your own money – raise it from others instead. I’m not going to talk about HOW to that in this article, but check out How to Find Investors To Fund Your Real Estate Deals to get a better idea how to start.

How to Structure House Flip Deals with your Investors

If you know how to structure the deal and what the logistics are, you become much more confident and effective at raising as much money as you want for your house flips.

The good news is that structuring deals with investors for house flips is a lot simpler than syndicating apartment building deals. I pay my investors 12% simple interest, they receive a promissory note that is guaranteed by the property, and they receive their principal and interest when the house sells. And best of all, the title company handles all of the paper work.

RelatedHow to Structure Syndicated Investor Deals: What Investors Are Looking For

Because this is easy for people to understand, the perceived risk is low and the returns are great, I found I have no trouble raising money from friends, family and acquaintances with a minimum investment of $25,000.

The trick is that you need to work with a title company that is familiar with handling this type of transaction in the way you want it. Not every title company knows how to do it, but plenty do. You just need to describe it and see if they’ve done this before.

Here’s how the Process works when you Purchase the Property

Let’s say you’re buying a house for $65K and it requires $25K in repairs. Add in the closing and holding costs and maybe a little more for unforseen situations, and you might want to raise $100,000 from investors. If you’re minimum is $25,000 then you’ll need 4 investors.

OK, so by now you’ve found a title company that can handle this and you have verbal commitments from the investors. Now you instruct the title company to create the promissory notes for you. You might have to pay a little extra for this, but once you have one promissory note you can modify it for each investor. You then email it to each of your investors for review.

Make sure you remind the title company that they need to reference all four promissory notes in the Deed of Trust. This effectively collateralizes each note with the property. If the title company doesn’t know how to do this, find another title company.

You instruct each of your investors to send their payment to the title company for deposit into the escrow account for closing. At closing itself, you sign and notarize each of the promissory notes and the deed. The title company records the deed (this protects your investors!) and mails out the original promissory note to each of the investors.

And you then get a check that you can deposit into your bank account that is to be used for repairs and holding costs.

That’s it for the purchase!

What About When I Sell?

When you sell the property, the title company again handles the transaction. They will ask you for a payoff statement, which contains the principal and interest that is to be paid to each of the investors out of the sales proceeds. The title company may have a template for you to use or you create your own.

The payoff statement includes the name and address of the lender, the amount of principal and interest due, and instructions for sending the payment to the lender (check or wire transfer). Usually the title company will require the lender to sign the payoff statement.

Once you have the payoff statement back from each of your investors, you send them to your title company and they will take care of the rest. They will incorporate the payoff amounts on the HUD-1 and send the money to each of your investors.

While you do need to interact with the investors, you’re never touching the cash, and that puts the investors at ease and makes you look more professional.

I hope this article gives you better insight into how to structure deals with your investors so that you can more confidently raise money to fund your next flip.

Related: To Syndicate or Not – This is The Question (What Would You Do?)

Let me know what questions you have!

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{ 18 comments… read them below or add one }

James April 28, 2014 at 5:45 pm

Michael

How do we do this on a double close scenario. Where i would like to use privatte investor as first close and fannie mae as second. Currently i use hard money for first close. Fannie mae also wants the rehab to be in escrow and released only after the rehab is done. Even bard money guys do that.. Private money would be cheaper due to no origination cost.

Reply

Michael Blank April 28, 2014 at 6:01 pm

James – I don’t see much different in a double close scenario: you give the investor(s) a promissory note, and the closing logistics are handled by the title company. What concerns do you have about this method?

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James April 28, 2014 at 6:35 pm

Not really a concern but i am noting a difference between direct flips with double close strategy.

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Shayne April 28, 2014 at 5:49 pm

How does this work if you use hard money for the purchase and you want to syndicate for the repairs cost? Can it work?

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Michael Blank April 28, 2014 at 6:03 pm

Sure. You give the investors a promissory note, and put their investment in the repair escrows account. The only thing is that the hard money lender would need to allow this, and the investors’ note will have to be subordinate to the hard money lender’s note, but your investors probably won’t have any trouble with this. Of course, the best thing to do is to raise a little money and not do hard money!

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Shayne April 28, 2014 at 6:09 pm

Thanks Michael!

I primarily invest in Washington, D.C. where the cost of entry is super high. Raising 400-500k right now is tough as a new investor. I don’t have friends/family with 100k on hand.

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Coty Leon April 28, 2014 at 6:34 pm

When there are multiple partners involved, how does the title company decide who gets to be on which lien position? This may make a big difference since the person in the first position will have superior rights over others if the property goes to foreclosure.

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Michael Blank April 29, 2014 at 7:48 pm

Coty – all investors/lenders *share* the first position – they are equals. Technically speaking, if the investors were to want to foreclose on you, they would all need to agree on things. This is not normally an issue or objection for friends, family and acquaintances who are not asking questions about when things go terribly wrong. This is only an issue for more sophisticated investors, and I don’t advise that you take their money. For example, hard money lenders are “sophisticated” investors. I’ll write more about this in my next article because the type of investors you take on makes a big difference.

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Douglas Dowell April 28, 2014 at 7:38 pm

Outstanding post!!! I think this is the superior way to fund flips versus hard money…ie cut out the middle man a get better pricing.

The trick is to be careful with state securities law….it seems to me two or more investors puts you back into syndication land.

Thanks for the outstanding read on private money!!

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Jay April 28, 2014 at 7:48 pm

How would you work this syndication approach with Sheriff Sales – where you need cash upfront for the deposit and again hard cash when picking up the sheriff’s deed afew weeks later.

One potential way I can think of is creating an LLC for each property. An an example create an LLC with lets say 3 members (each being the investor) – take the sheriff’s deed in the name of the LLC. Repair, Sell and Close. When sold, the LLC dissolves and payment is remitted to each partner.
Any others?

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Michael Blank April 29, 2014 at 7:50 pm

Yes, or your LLC borrows money from your lenders who get a promissory note. Simpler. But I’ve not done sheriff’s sales and therefore am not that familiar with the logistics, so maybe it can’t be that simple -;)

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Eric Drenckhahn April 28, 2014 at 8:58 pm

I have seen larger apartment complexes that needed and SEC attorney to put together an offering. I suspect that this is exempt from that, due to the note on the property itself. In effect, they are offering a mortgage.

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Curtis Waters April 29, 2014 at 4:53 am

Can you address SEC issues?

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sheen April 29, 2014 at 5:41 am

Great Post! Thanks for sharing such a detailed post.

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Kathy April 29, 2014 at 6:40 am

This is pretty much what I’m trying to do with my first flip. Good to know what I’m doing has been done before. Only thing I hadn’t thought about was having the title company handle it. Since I only have one investor for the whole amount I thought it would be pretty easy to handle. Would you have a sample template for a promissory note and payoff statement that I could follow? The other thing my investor asked is that he be listed on the insurance policy as an additional insured. Is that something that would normally be done? Thanks for the great information!

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Michael Blank April 29, 2014 at 7:52 pm

Hi Kathy … it’s best that you have your title company give you a template for the promissory note. Adding your lender as an additional insured is a great idea too!

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Willie B April 29, 2014 at 4:33 pm

Mr. Blank,

If Proof of funds are required can this method still be used?

Thanks in advance and great post!

Willie B

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vadim May 1, 2014 at 11:03 am

Great post, Michael! I wasn’t sure how this “reference all four promissory notes in the Deed of Trust” actually works. Are they liens or listed as co-owners with certain interest?

Reply

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