I am working through some details and trying to understand the process of getting started in a Fix and Flip/ BRRRR hybrid real estate investing strategy. I think my biggest source of confusion is between the offer and the closing. Please tell me if I am wrong in my understanding on how this works:
- My offer is accepted and the house goes under contract
- In my offer, I put a 7-10 day contingency for due diligence on the property
- I put up "earnest money" to hold the contract
- In that 7-10 day window, I need to line up the following:
- Ensure the utilities are on for the period in my name
- Schedule a walk through with a either a GM or Home inspector
- Begin to work through financing the deal
- Get Bids from Contractors
- Once the inspection is complete, I need to develop a Scope of Work and get bids from a Contractor
- If all the numbers work out, then I pull the trigger on the deal
If my assumptions are correct, then my questions are as follows:
- How do I engage lenders without having a deal? I would like to know the likelihood of getting approved for a deal, do I need to identify a deal before that happens?
- Can I interview GC's BEFORE I have a house under contract? If not, how do get them in the property and bids back in that 7-10 day window? Do I just come here and ask for referrals?
- Can you REALLY schedule all of these things in 7 days?
I am a newbie here. I am working on my 7th flip this year, so...others with more experience will probably have different advice.
My process is similar:
- Offer is accepted
- Earnest money is sent
- Inspection is lined up (I get this done 1-2 days after the offer is accepted). My inspector gives me a report within the same day (next day max). I had an inspection done on a home today that my offer was accepted, but...no earnest money crossed hands, yet (this is a unique situation). Make good friends with an inspector and let them know you will be using them for repeat business (if they are good).
- Go through the "rough" numbers of the reno. I am lucky in the fact that my business partner is very good with this. We sit down and go through the inspection, line by line, to determine rough cost. We already have a good idea of what the reno will cost us as we do the walk through...before we put in the bid. You may want to take pictures/video as you do your walk through and consult some contractors to get a rough bid on what it may cost to fix (not sure if contractor will be willing to give you a bid off of pics/video). I use the inspection to make sure nothing "crazy" is there that I don't know of before the bid is submitted. I backed out of a project 2 weeks ago after getting the inspection. Lost money on the inspection, but that saved me from losing LOTS of money down the road.
- I don't get utilities turned on until the house is in my LLCs name.
I would think you would want your financing arranged before you submit your bid. I just bought a vacation house and I had a pre-approval letter to go with my offer (there were several offers and my offer was picked...and, I think the pre-approval letter may have helped with that one). We buy our flip houses cash (we do use private lenders for this), so financing isn't an issue.
I have heard it said not to get contractors into the house until after its yours. Not sure where I read that, or why. That's a good question for an experienced flipper. It would be great to get the contractors in there after the inspection, for you to help estimate your repairs.
Once you can get good at estimating the repairs when you do the walk through, the biggest issue you will have is scheduling the inspection.
I hope that helps somewhat, if any. I am learning as well :)
You need a financing contingency unless you have available cash. So, you would have 10 days for property inspection (hire a professional unless you have good knowledge) and also have a 45-60 financing contingency unless you have the funds. Otherwise, even though it passes inspection, you could lose your EM deposit without having the financing contingency. It would not hurt to start talking to lenders even before you have anything under contract. They can give you guidance so you will know what you can qualify for in terms of amounts, etc. If you need bids from a contractor, you can give them the inspection report which should give them an idea of what must be fixed. Don't get carried away on improvements if it is going to be a rental. Flips you generally may want to upgrade more than a rental.
Thanks so much for the replies! When talking to financiers before having a deal, what are good questions to ask? Do they pre-approve investors like you can if you are buying a home as a home owner?
What type of financing do you intend to use? The trouble with many BRRRR-candidate properties is they may not qualify for conventional, FHA, or VA financing, necessitating cash or hard money for the initial purchase, and then a refinance (the second R) after renovations are complete.
So, if you are using hard money, for example, then you absolutely should have it lined up before even making an offer. It is customary to include your proof of funds or pre-approval letter with the offer, and many sellers will not even consider an offer without it.
Your contract should specify your inspection period - and you are generally correct on how that works.
If you are using cash or hard money, you generally do not have a financing contingency, which makes it even more crucial to have your funding lined up before making the offer - because once the inspection period has passed, you generally cannot and do nor get your earnest money deposit back. (On that note, make sure you document your contract effective date and know how time is counted in your contract...is it business days or calendar days? Do weekends and holidays count? What if the last day of the inspection period falls on a weekend or holiday, does it roll over to the next business day?)
If not using cash or hard money, your contract should also outline a financing contingency, which has it's own timeline, such as:
- Make application for financing within 3-5 days of contract acceptance (this is the next step after getting pre-approved. You still have to apply for the specific loan in the amount of your purchase once you have the executed contract).
- Order and receive an appraisal within XX days.
- Receive a loan commitment from lender within XX days (or XX days prior to closing).
- Final funding approval XX days before closing.
- There may be other "checkpoints" - you need to know your contract inside and out.
Finally, to answer your other question: Yes, mortgage lenders will provide a pre-approval letter for an investment property. The pre-approval process will follow generally the same process as an owner occupant. But the underwriting requirements for the actual loan may differ (for example, the down payment/LTV requirement is typically 25%/75% versus 20%/80% for owner occupants).
Conversely, your hard money lender should be accustomed to providing proof of funds letters verifying you have your finding lined up if you're going that route.
I should have about 40K in cash. In the area I am focusing in, most REO and distressed properties are going for 9K-35K, and have an ARV of 75K-100K. So i can probably just pay for cash out for the property if needed. I would need to finance the repairs, but that seems backward. So my thought is to use my 40K for repairs and get the a HML to finance the purchase. Does that sound right? Will an HML fund near 100% if I am fronting the repair money?
Chris, I have a loan customer who did just that...applied for purchase funds, then paid for rehab out of pocket. Hard money will give you usually 65% LTV or 80% purchase price, whichever is less, depending on the lender. Hard money usually has a minimum purchase price of $75-100K, however, due to higher fees for this type of loan. Most brokers won't talk to you unless you have a contract in hand, but you can easily get proof of funds letters in advance. Definitely use the financing contingency when going this route. You might get a partner to help fund the project, then split the profits if you're looking to do a straight flip. If you're looking to hold and rent, or do an owner financing for an end buyer, you have more options of long-term financing after the rehab is completed and at ARV.
I just sent a pre-approval application to Lima Capital. They will pre-approve you and give you a proof of funds letter without a deal. Once I get an idea of what they have to offer, I will try other lenders as well. Is it a good idea to have multiple lenders ready to go? Makes sense to me at least.
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@Account Closed I think what they mean is that they will send a proof of funds letter to me based on the amount I am "pre-approved" for. Much like in a conventional home loan, you go to the bank and they give you a letter you can give buyers stating that you are very likely to get this financing for a certain amount. Lima Capital is pretty big and from what I can tell pretty respected...I doubt the letter would be "fraudulent"
Lima Capital is completely legitimate, well funded and has no need to do anything fraudulent. They are a well respected player in this industry so no need to worry. You are correct in that they are telling the world they've pre-approved you for a certain amount of money and the letter they give you is 'proof'.
Your issue will likely become your loan sizes. If you pursue homes in the range you described you'll find it difficult to find any lenders willing to go that low. I'm at a minimum loan amount of $75,000 and I know others are higher than that. I believe Lima is at $50,000 monimum.
The other issue you'll face is that your rehab costs may exceed the purchase price by quite a bit. Most of us will not allow this unless you can present significant experience in real estate investing.
Cash may be your best option for the first deal or 2. Get those behind you and lenders will have a more warm and fuzzy feeling about bending guidelines for you.
Best of luck!
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