Earnest Money Down Payment For First Flip

5 Replies

Hi new & experienced investors, I need help with the initial deposit on my company's first flip, I have spoken to several hard money lenders but maybe not the right one yet. DoHardMoney does offer 100% financing (up to 70% arv) but you need to put down your own earnest money which (in Massachusetts) is typically $500-1000 with your offer and 2.5-5% down with your p&s agreement. Is it wise to take out a personal or small business loan to cover that initial down payment? Or is there a hard money lender that can assist with this portion as well? DoHardMoney is $3,000 up front to invest in their program with $2,350 promised back to you at your first closing. The plan would be to rehab and sell the property and pay back DoHardMoney and the personal/small business loan immediately and hopefully have enough left to use my own 2.5-5% down on the next one. Thanks for your help.

@Colleen Fiumara   Hi Colleen, this is only my opinion and I do understand how much you want to get started. If you are that cash strapped I would wait. You need to at least have enough money for that and a little extra in your pocket for when something happens you didn't anticipate. Work as hard as you can for the next month or two, save every dime you can and then go at it full throttle. You will have a much better chance of being successful. If you have a family member you could borrow the money from, that would be great. I'm using Do Hard Money for my first flip as well, I've started driving for dollars, my brother is UPS driver, so he's my bird dog and I've started working with my Realtor as well. Wait until you check the new software system they have. It's called Investors Edge and it's amazing.  You will love working with Do Hard Money and if you have any questions please feel free to PM me. I would be happy to help you in any way I can. 

@Colleen Fiumara I highly suggest you wait as well. @Christi Hawkins is correct, it is imperative that you keep extra reserves. Most HMLs will want to see bank statements for up to 90 days showing you have the cash reserves. I am not sure how Do Hard Money works but most that cover 100% of the job (like the company I work for) also require benchmarks to be met before funds are released. This could mean you may need to front some payments and get reimbursed through the draws on the loan. You also will need cash to make your interest only payments. There are some "shotgun" loans out their that don't require interest payments until the property is sold but this is normally only offered to seasoned investors who aren't utilizing a 100% financing tool.

I know it is so tempting to get started quick, especially in Q4 when there are a lot of deals available, but I think it is prudent for you to wait just a few more months to build your cash reserve.

I'm going to be vote No. 3 here, Colleen. You simply have to have the extra reserves for a flip. Ideally, you will also have a highly capable handyman in the person of yourself or a partner who could step in as the "general fixer of last resort" when stuff gets ugly.

Waiting until the time is right is not bad, even though it's frustrating watching deals slip through your fingers. Investor paralysis IS bad. Thankfully you don't have that issue.

Ain't nothing wrong with dumpster diving, thrift stores, and 50 degrees in your house if those measures get you where you need to go financially. This is an utterly ruthless business and it very impersonally crushes the unprepared.

Unfortunately my gut is to echo my peers on here and advising you to wait. Investing, especially in the flip space is a volatile business and if you are already strapped for funds just to get the deal started this might not be the ideal strategy for you. 

Yes, you can borrow a second line of credit to make the EMD and other deposits but what if your property needs to be held for 1 more month instead of selling right away? What if you run into construction delay or your comps are not a reflection of the current market?

Given those variables, you should wait until you have enough reserves to make sure you can go into this deal confidently and not strapped to the last penny. Use all of this focus and building your business and you'll make the money in no time. Imagine the hours that you're scouting for deals are the hours you're servicing clients and lead gen-ing .. that's a great return as well.