Deal Review: House Flip - Proprietary Deal
Community,
By way of quick background, I'm a young non-real estate private equity professional and really believe in talking directly with people who know their stuff. My network really is limited in the house flipping world, so I felt BiggerPockets would be a great channel for discussion.
I have stumbled across a unique (I believe) non-marketed deal in the flipping space. I have never flipped a home before, but have worked on many middle market and large business transactions so am diligent up front.
A close friend of mine's parents passed away last year and he was left with an negative balance estate and a ~$450k mortgage. He is in NJ where there is no personal liability for the Executor of the Estate if he chooses to have the bank foreclose, so this is currently what he was planning on doing.
However there may be an opportunity for him to assume the mortgage and for us to do a deal.
He tried to sell through a broker a few months back in the $525k range but could not find a buyer. The house has not been kept up but its in a really really good neighborhood (I grew up there) and the last 3 houses sold for $580k, $620k, and $675k (this one had a lot of work done). This house is ~3,700 sq. ft. on 2 acres and a pretty solid front view of the mountains.
Our thoughts were that he would assume the mortgage from the estate and I would fund all the requirements associated with a renovation project. We would then target a $625k sale. I read about the 70% rule that says you should take your projected exit price net of your renovation expenses and multiply by 70% to get your optimal purchase price (in this case it would be $350k).
I am modeling the project with $70k budget for general contractor and interior designer to update the kitchen and related appliances, new carpets, maybe some fresh paint (or whatever else the designer suggests like new ceiling fans, etc.), master bathroom, and some other minor items we are missing in initial projections.
This would put the bank 1st lien / 1st dollar out, with me as an unsecured note to my friend at 20% annual non-cash interest rate for $70k and a 35% ownership in the gains (his only initial risk is assuming the mortgage which is below the market price of the house).
Questions below:
1) Is this a crazy deal? Are we not projecting enough for the renovation or expenses?
2) Any suggestions on hiring a couple general contractors to come in and evaluate/provide a quote?
3) Is there a big opportunity to negotiate with the lender and how much? (Possible to go to $350k from $450k for example?)
4) Should we consider bypassing the broker and self-advertise on the exit?
5) What other expenses are we not considering? Assuming vacancy insurance, mortgage P&I, title, small expense for permitting, potentially property tax for ownership
6) How long should we project to hold the property for? I read 4-8 months on average for a renovation and a flip but I'm assuming 9 months.
7) Is there a lot of risk at $450k mortgage, 9 month hold period, and $70k renovations? Essentially need to sell at $570k+ with all the expenses factored in (we don't knw if this is probable)
Apologize if any of this is so obvious, but we are inexperienced in this space.
Thank you!