Making money using hard money and wholesalers

Buying & Selling Real Estate
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Making money using hard money and wholesalers

Chris White
Investor · San Antonio, TX · Member since 2013 · 14 posts · 3 votes

So we closed on selling our second flip today and both deals were with a hard money lender and a wholesaler, at the end of the day we lost money. We thought we had made a small profit on the first and had rolled in to the second and today doing a final accounting of the numbers the loss was clear. I went back to the HUD's for both properties and realized that we did not account for the large fees for closing and that affected our profit from the start. If you have dealt with a wholesaler before to get the house you have to give a $5,000.00 non-refundable deposit and then go get the loan.

We are just starting and have a small amount of capital to work from, we are considering a shift in strategy but my question is has anyone made money working with a hard money lender and a wholesaler?  I would be interested in learning what made you successful.

Thanks,

Chris

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Rick Pozos
Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes
10y

PS I would NOT recommend certain Large wholesale companies in San Antonio. Ask other investors. Everybody that I know has come out pretty close to break even with the "we sell 20-30 deals per month" companies.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    I think you experience is more typical than not.. Texas wholesalers are pretty rough crowd then add hard money and well there ya go.

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    2Reply
  • Mark Gallagher
    Flipper/Rehabber · Allentown, PA · Member since 2011 · 1k+ posts · 701 votes
    10y
    Chris White Hopefully those will be the last of your losses. I'm not sure I follow your $5,000 non-refundable deposit statement. Are you saying the wholesalers charged you $5,000 non-refundable deposit? You can certainly make money with a HML and a wholesaler. It's a numbers game. You obviously paid too much for the loan, the property, or the rehab, or all three. My guess would be the property cost too much and you spent too much on the rehab. If you post your numbers here I'm sure we could give you some pointers.
    1Reply
  • Chris White
    OP
    Investor · San Antonio, TX · Member since 2013 · 14 posts · 3 votes
    10y

    Yes this particular group if you want the house you secure it with a $5,000 non-refundable deposit.  When the house closes the $5K is used as escrow money.  OK I am out to learn something here and would agree that the rehab got us here are the original numbers that got us started.

    Purchase price - $137,500

    ARV - $230,000

    Est Repair - $35,000

    Loan had 4% origination, 11.99% loan amount $150,000

    This is where the numbers ended

    Sold for - $229,500

    Total repair - $49,000 - loan allowed for $26K available for draw which was used. We had $11K in plumbing repairs that we not anticipated.

    Carrying costs  - $10K

    Closing costs  - $15K

    Purchased the house end of Feb and sold it today, got a full price offer within 8 days.

    Let me know if this helps.

    Thanks,

    0Reply
  • Raul Ramirez
    Lender · Upland, CA · Member since 2016 · 2 posts · 2 votes
    10y

    Many of my clients work with wholesalers and myself (a hard money lender) and are able to still make a profit.  As long as all costs involved are considered including the acquisition, rehab, holding, and closing costs for escrow/title and give yourself a pad for extra holding costs in case you can't sell the property right away and a pad for the rehab (for unexpected repairs) and you can still realize the profit you are seeking, then using a wholesaler and/or a hard money lender won't matter.

    It seems that what made this project unsuccessful for you is the unexpected repairs.

    Best wishes on any future deals you do!!!!

    1Reply
  • Mark Gallagher
    Flipper/Rehabber · Allentown, PA · Member since 2011 · 1k+ posts · 701 votes
    10y
    Chris White Right off the bat $11K plumbing repair stands out. What exactly was done for $11K. Around here you could put an entire septic system in for $11K and could plumb an entire house for much less than $11K.
    1Reply
  • Mark Gallagher
    Flipper/Rehabber · Allentown, PA · Member since 2011 · 1k+ posts · 701 votes
    10y
    Chris White Missing some costs here? $229,500 -$49 -$10 -$15 $155,500 ??
    0Reply
  • Mike Hanneman
    Investor · Coeur d'Alene, ID · Member since 2016 · 551 posts · 218 votes
    10y

    Unexpected repairs hurt you for sure. Why did it take so long, almost 5 months to finish and flip? Did you account for holding the property for that long?  

    0Reply
  • Nicole C.
    Realtor and Investor · North Hollywood, CA · Member since 2015 · 49 posts · 25 votes
    10y
    Looks like repairs was the kicker Perhaps selling it as it was with cosmetic makeup would have helped or selling it to a more experienced investor would have worked as well. We don't have to fix a house back to mint condition.
    0Reply
  • Jason Hirko
    Lender · San Antonio, TX · Member since 2016 · 1k+ posts · 1k+ votes
    10y

    @Chris White I'm curious what were the wholesalers' estimates of ARV and Rehab? Also, your rate is not particularly good. Once you get a few profitable flips under your belt, count on that cost going down by 2-4%.

    As for the $5,000 down - doesn't that get applied at closing? So it wouldn't add to your costs, just an unpleasant way to buy a property?

    2Reply
  • Chance Housos
    Investor · Sachse, TX · Member since 2015 · 223 posts · 66 votes
    10y

    @Chris White

    If I did my calculations correct you should have made $9K. The loan points are a bit high but other the that everything seems pretty close. What was the plumbing cost from, was it the foundation?

    You can make money with both wholesalers and hard money but your profit will be less. I always figure 15% of ARV for closing, selling, and carrying cost when using hard money.

    Shop lenders and vet the wholesalers. There numbers are usually off at least $10K one way or the other, especially with the bigger ones. 

    3Reply
  • Chris White
    OP
    Investor · San Antonio, TX · Member since 2013 · 14 posts · 3 votes
    10y
    Originally posted by @Mike Hanneman:

    Unexpected repairs hurt you for sure. Why did it take so long, almost 5 months to finish and flip? Did you account for holding the property for that long?  

     It took 30 days to close on the house when we purchased it, rehab was done in about 60 days and it took almost 10 weeks to close. We planned on having it 4 months.

    1Reply
  • Chris White
    OP
    Investor · San Antonio, TX · Member since 2013 · 14 posts · 3 votes
    10y
    Originally posted by @Jason Hirko:

    @Chris White I'm curious what were the wholesalers' estimates of ARV and Rehab? Also, your rate is not particularly good. Once you get a few profitable flips under your belt, count on that cost going down by 2-4%.

    As for the $5,000 down - doesn't that get applied at closing? So it wouldn't add to your costs, just an unpleasant way to buy a property?

    Wholesaler estimated ARV to be 230,000 and rehab to be 35K. Yes you are correct the 5K gets used as escrow at closing. I doubt I will use that lender again.

    0Reply
  • Chris White
    OP
    Investor · San Antonio, TX · Member since 2013 · 14 posts · 3 votes
    10y
    Originally posted by @Chance Housos:

    @Chris White

    If I did my calculations correct you should have made $9K. The loan points are a bit high but other the that everything seems pretty close. What was the plumbing cost from, was it the foundation?

    You can make money with both wholesalers and hard money but your profit will be less. I always figure 15% of ARV for closing, selling, and carrying cost when using hard money.

    Shop lenders and vet the wholesalers. There numbers are usually off at least $10K one way or the other, especially with the bigger ones. 

     I am going to go over the numbers one more time tonight to see what we didn't account for and thanks for the tip on the 15%.  As I look for the next house I will use that to help see the numbers before committing.  

    1Reply
  • Chris White
    OP
    Investor · San Antonio, TX · Member since 2013 · 14 posts · 3 votes
    10y
    Originally posted by @Mark Gallagher:

    Chris White

    Right off the bat $11K plumbing repair stands out. What exactly was done for $11K. Around here you could put an entire septic system in for $11K and could plumb an entire house for much less than $11K.

     We leveled the foundation and there were (5) sections of plumbing under the slab that needed to be repaired that was $9K and then there was a slab leak with one of the water lines and the reroute was just under $2K.  

    0Reply
  • Jason Hirko
    Lender · San Antonio, TX · Member since 2016 · 1k+ posts · 1k+ votes
    10y

    @Chris White Looks like the wholesaler's ARV was spot on, so it was the rehab estimate than sunk you. I guess the point of contention is should they have known about the major plumbing issue?

    As for the lender, 12% and 4 points on a 20% down payment project is not great for San Antonio. Usually rates like that are on projects where the lender is lending 75% of ARV. With a down payment like that, you should have got 11 and 3 on your second flip, and 10 & 2 on subsequent flips. That would have saved you $3k in points and $1,250 in interest. But even so, it looks from your number that you netted $18,000??

    0Reply
  • Vincent Pace
    Lender · Northbrook, IL · Member since 2014 · 198 posts · 50 votes
    10y

    @Chris White I can't recommend enough sitting down in front of an excel spreadsheet and calculating your cost of capital. Am I paying points, if so, how many? Points can definitely make or break a deal, yet many investors aren't sure how many points their lender charges. Am I paying junk fees? Treat these as points on the loan. Am I paying interest on capital funded or on the total loan amount? For projects with hefty construction, paying interest only on cash funded can help you save money for sure. And finally, ask if you're working with the direct lender or a broker. A broker might find you lenders you couldn't find on your own, but they will charge points to do so. OM me for more info.

    Best,

    Vince

    1Reply
  • Jose Rodriguez
    Real Estate Agent · San Antonio, TX · Member since 2013 · 13 posts · 1 vote
    10y

    Did you work with Networth Realty?

    1Reply
  • Tim Macy
    Real Estate Agent · San Antonio, TX · Member since 2014 · 311 posts · 176 votes
    10y

    @Chris White I'm not on here all the time, but feel free to give me a call about your business.  Your story is becoming the norm around here these days.

    1Reply
  • Wendell De Guzman
    Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
    10y

    Going into the deal, your projected profit is already very thin.

    There are 2 reasons why you LOST money in the deal:

    1. You are 40% overbudget on your rehab ($49K vs. $35K). 20% overbudget is OK but 40% is too much.

    2. Not sure why you paid $15K in closing cost. The origination should only be $6K and not sure how much the closing cost is in Texas but here in Chicago, closing costs is around $2500-$3,000. Multiply that by 2 and you end up with around $12,000 total ($6K origination + $6K closing costs). Maybe you need a better title company.

    So the problem is not with your wholesaler and hard money lender. The problem is with your GC and your title company. 

    Also, you need a better deal than this to ensure you have enough profit in the end.

    1Reply
  • Jason Hirko
    Lender · San Antonio, TX · Member since 2016 · 1k+ posts · 1k+ votes
    10y

    @Wendell De Guzman I think the wholesaler he used does double closings, in which the buyer pays the costs on both...

    0Reply
  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    10y

    Buy lower.   We fund deals for wholesalers and flippers all of the time and they make money.  Buy deeper.  If the deal doesn't work, then go to the next one.  

    1Reply
  • Rick Pozos
    Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes
    10y

    Lots of people right now feel like they have to do a deal or they are going to miss something. Dont get over excited about doing a deal. Now that you have some experience, you should be able to rationally look at a deal and prepare for uncertainties. Add in all the extra closing costs that you might have, add in the repairs that you come up with, not what they tell you. Then add in about 25% more for contingency. THEN and only then, if there is 25k+ in the deal for you, do the deal.

    When a wholesaler tells me there is 30k or 35k in the deal, I dont even blink and I will say pass. Not that I have to make 40k on a deal, its just that I know there are closing, holding and unexpected costs involved.

    1Reply
  • Rick Pozos
    Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes
    10y

    PS I would NOT recommend certain Large wholesale companies in San Antonio. Ask other investors. Everybody that I know has come out pretty close to break even with the "we sell 20-30 deals per month" companies.

    4Reply
  • Jason Yahner
    San Antonio, TX · Member since 2016 · 47 posts · 22 votes
    10y

    I have noticed several mention that he over paid on the deal from the start. Just curious how long did it take for you to get the feel for what you should be paying in a certain area of San Antonio? Do you divide the city into areas or is it more specific to neighborhoods? Do you rely on comps? I know to be successful I need to get a good price from the start. Also do you prefer target and stay in one area of town so you aren't driving all over God's country ? Thank you to anyone willing to share. I hope it add to the conversation.

    0Reply
  • Rick Pozos
    Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes
    10y

    You know what the ARV is for the property from getting comps. Take your purchase price, add in you closing costs twice (once to buy, once to sell), monthly payment for 6 months, 6% for realtor to get the property sold and also add in the rehab budget +25% more for overruns. Now you have your all in price? Subtract that price from your ARV. Is the difference 20k? maybe 25k? What are you ok making for a 3 to 6 month project??

    This is your worst case scenario. 

    3Reply
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