Private Money Lender on potential flip.

9 Replies

Hello everyone.

I have a potential flip in a desirable area. It is a Freddie Mac owned property in a town about 20minutes away. I have seen the property, run the numbers, and see it as a very good investment.

1940 Colonial, 1200sqft living space. 2 (Possibly 3) Bedroom, 1 Bath. Partially finished basement. very large kitchen, with patio, porch, 2 stall heated and wired garage.


Needs a roof, replacement cabinet doors, some wood trim, new appliances, and a new kitchen floor.

Asking price: 185,500

ARV: 230,000

Estimated offer 155,000

Here is my dilemma. I am a firefighter/paramedic and I am forced to live in the town I work in, therefore owner/occupant is out of the question. I only have enough cash for about 10% and it requires 20% as an investment property. Does anyone know of any ways around this? Or possible ways of finding private money lenders? Any tips are very appreciated.

Hello Sean,

Have you talked to any Hard Money lenders? I have the names of a couple that I would gladly connect you with. Send me a message if you are interested.

Calling @Ann Bellamy , who loans on flips in your area.

Borrowing for a flip using conventional financing and claiming you're an owner occupant is mortgage fraud, @Sean Connolly . I don't think you want to get started on that foot.

It's clear you're new at this because you specified the repairs (and lists like this are almost always incomplete), but you didn't specify the costs. If you add your desired purchase price to the repairs and divide that total by the ARV, you normally don't want the number to be greater than 70%. In your case, this would leave $6k for repairs: ($230k x 70%)-$155k = $6k. Do you think that's realistic? True, this is just a rule of thumb, and more experienced rehabbers can push the percent a little, but it's a formula that works.

Realistically, you should prepare the longest list you can of all the anticipated expenses (repairs, property taxes, title & hazard insurance, attorney/closing costs, HML interest, etc.) to get a better estimate of your maximum allowed purchase price and expected profit. Ask another local flipper, or someone like Ann, to vet this list.

It sounds like you might not have enough money to do this by yourself, but maybe you could find a money partner and split the profit somehow?

Good deals go fast, so you should have been looking for money at the same time you looked for a property. Always form your relationships and borrow locally. Out-of-town or national lenders will have no idea of the local rates, customs, or resources that could help you. You want a local lender on your side.

Good luck, Sean.


Thanks for the shoutout, @Jeff S

Sean, I don't generally lend that far south, so any help here should not be viewed as an offer to finance. I'm guessing you're looking at the Victorian cottage in RI, is that correct? I can't help you with comps in RI, either, so can't estimate if your ARV is accurate.

To estimate hard money closing costs in MA and NH, there is a "Deal Analyzer" on my website (link in my signature) that will help. It requires you know your rehab budget approximately, which you apparently don't, and your purchase price and ARV, which you do. It's a starting point and will help you estimate profit potential. They will vary in RI, but like I say, it's a starting point.

Second, there are few conventional lenders who will lend on flips, since they typically don't like the short term nature of the deal. So 20% down as an "investor" property is usually reserved for a buy and hold. If you take out conventional investor financing and then sell in 6 months, neither the lender nor the originator will like you, and won't lend to you again.

You can't get around the owner occupied issue: Don't try to buy as an owner occupant if you aren't. Unless you are ok with mortgage fraud.

So you are stuck with getting a money partner or using hard money. If you want to use hard money, I suggest attending the RIREIG, you might find a lender or partner there, Rick Cohn runs the group and if there aren't lenders there, he might be able to connect you with a couple. Be sure to tell people that the project is in RI, (that's assuming it is) because the state matters. If it's not in RI, but in SE Mass, he still might help with connections in your area. There is also Eastern Mass REIA, talk to Jim Rich. I've sent you a PM request, if you respond, I'll send you a hard money broker in RI also.

Hey Sean

I don't have the impression you are looking to be shady and buy an a owner occupant. Sounded to me that you can't use that as a strategy even if you were willing to live in a rehab property to get a low down financing. Given that it sounds like you don't have much more than $15K living in a place and doing a 203k loan would have been a nice option for you, but is off the table unless you find a plan right in town for you.

Anyway I also want to agree with Jeff that the deal seems wicked thin, as we would say in the vernacular. First thing that jumped out at me was what he pointed out that with your ARV and offer price you were looking at a $6K budget. As he said some people will take a thinner margin, but the ones that do that SUCESSFULLY are people with lots of experience and know their market down to a tee and know their exact cost of financing. You obviously don't know that 2nd part even if you nailed your ARV perfect.

Just based on what you listed for repairs and the house specs and the fact it is an REO (So you will have a lot more stuff that COULD come up that is hard to see until someone gets all the utilities on and start using stuff in the house again) I would budget a bare minimum of $20K for the stuff you are doing, and that is going to be pretty low if there is much past what you listed. So using those numbers a typical MAO will be more like:

230K x 70% - $20K = $141K

Note that is the MOST you would want to pay so not a good idea to offer that right off the bat since you will inevitably get a counter being that far under the list price (that is if it isn't just rejected). This also is assuming you nailed the ARV and a pretty optimistic budget. To be honest looking at this thing without any other info and assuming you have the right ARV I doubt I would offer more than like $108K to start and wouldn't go over like $120K.

Hey everyone, thanks for the advice. Thought I was clear by saying owner/occupant was out of the question, that I wasn't trying to lie. I meant is there other financing opportunities available. As far as the rehab costs, being in my career field, a lot of my co-workers have legitimate side businesses ( Electricians, Home Inspectors, Plumbers, and Roofers) and I have spoken to the roofer who has given me a rough estimate around 3K, which I know is a good deal. As far as the other work, I plan on doing the work myself, so just paying for materials. And hopefully the utilities are in working order. The electrical looks like it has been recently updated, and furnace as well ( Also been winterized). I am sure that I will run into other problems, but I am very motivated to get this done quickly, keeping holding costs to a bare minimum. I only work 2 24hr shifts a week, and plan on making this project a fulltime job. Just need help with the financing!

@Sean Connolly, I think I found the house you're describing in RI. From what I see, it just needs a new kitchen and some interior painting. The new kitchen will eat up a lot of your potential profit, since there is not that much of a difference between your purchase price and ARV. The other downside to it that I see is it's small - 2 bedrooms at 1200 square feet. That limits your buyer pool, as it's too small for most families.

One thought however - are you in the market for buy-and-hold? Since this is in a nice town near a college, it might make for a good rental property. I don't know the numbers for rents down there, but you might want to consider that as an option. If you can partner with a friend to get the down payment, maybe it would be worth it as an income property for you?

Good luck - on this deal or a future one!

Sean, one of the biggest problems if you are borrowing hard money is doing the work yourself, especially if you work a job. While you only work 2 24 hour days, it will always go slower than a good contractor. The issue with this is that the interest, taxes and insurance and utility clock is ticking, so what you think you are saving by doing it yourself, turns into pretty much nothing because time eats your profit. Typically you are generally slower than a team of contractors, even if you are working full time on the project.

Just for giggles, lets assume you borrow $150K. If you can get 12 percent interest, grab it, you are new. That will cost $1500 per month in interest payments. Taxes are $225/mo, and insurance will run about 100/mo on an empty house being rehabbed, plus somel electricity and water. Let's say $1900/mo. If it takes you 4 months to do the work instead of 4 weeks, that is $5700 that you could have paid to a contractor to get it done in 4 weeks, get it on the market and not miss the summer market.

And if you make lots of mistakes, like most new investors do (not a criticism, you just don't know what you don't know yet) it will take longer than you think

Let's say you close by mid-May, finish rehab by July 1, you now have the summer to sell it. If you close by mid-May, finish rehab by October 1, you're in the fall market, and if it doesn't sell fast, you could heat it for the winter plus have all those extra months of holding costs.

Why am I being the forecaster of doom? Because I've seen it happen too many times. Just something to think about when you're calculating your numbers. Either get a partner if you're doing work yourself, or if you use hard money, hire a good contractor.

Besides the issues pointed out with the time and holding costs getting run up by doing the work yourself I also think you will have a hard time getting hard money on the deal as presented.

Even doing the work for the costs of materials and your buddies in the trades doing their parts very cheap, it is a thin deal.

You indicated that you only had about 10% to put into it. Most HML will want more skin in the game then that in general, throw in that you are brand new, the deal is very thin, and IF something does go wrong it will take MUCH more money then you would spend to hire someone to do it.

Different lenders will have different criteria, different deals can demand different terms, and prior relationships and experience can influence things. Unfortunately none of the extenuating factors are in your favor.

If your (verified) ARV was like $275K+ you could probably find someone to lend to you based mostly on equity since you could default and they would still be pretty much 100% LTV on the as is place with a big cushion to hire contractors to do the needed work and still have a margin.

Thanks, @Shaun Reilly , I didn't want to go there because I poured enough water on it already.

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