20% part of Holding

23 Replies

BP Family,

I have a question that has been killing me.  It may be dumb, however I need to have a warm and fuzzy as I am unclear how to calculate this and am loosing sleep.  I've had an 80/20 Construction loan for a previous flip and looking to get into an 80/20 Note 12-1 within the next few days.  Are you to calculate your 20% down into holding, or does it somehow get factored into the proceeds when paying back the loan.  I didn't factor this into my holding costs in my previous flip and am wondering if I made a mistake.  Here is my current situation:

HUD Home

Purchase Asking Price: 87,000 (Min net would leave me to believe 87 is needed to purchase)
Rehab Costs: 45,000
Holding 25,000
Sales Price 179,900
Profit set for 23,000

HUD is asking 10% for EMD
Lender asking 20% however EMD is applied to this 20% as Down Payment

Am I missing something here? Looking forward to your responses.  I haven't pulled the trigger yet on any contracts nor has or offer been accepted yet at 80K.

Not sure I understand the question. I wouldn't include deposit as part of your "holding cost" at all.

So long as you HAVE 20% deposit, you only need to give HUD half of it before closing.

What am I missing regarding your question? Cheers...

This is why I love BP.  Everyone is always there for you.  I most definitely will be going pro by EOY.  I just wish I could contribute to the contributors of my inquiries.  I would be more than happy to pay everyone for helping.

Back on Topic @Brent Coombs ,

I'm going to try an explain this the best I can as my brain is in overdrive and words may be all over the place.

I am second guessing my numbers because I cannot figure out where my 20% get's applied through the closing process. I understand with 10% EMD, only 10% is needed to go to the table however, does this reflect the 45K that is provided by the lender? If so, than my Reno Costs that I accounted for in this flip will cover my liquid (20% in) in the reno. I just want to make certain that everything that is put into this flip comes right back to me and zeroed out in the end.

What has everyone else done, and accounted for in the past?  I hope this makes sense.  Thanks Brent!

@Rick Turman your holding costs are simply the accumulated interest and utilities, and insurance you have until you sale the property.  It is not part of your 20% you need to pay down.  Now if your loan for buying the house and the loan for rehabbing are part of the same package there could be some more money you need to put down to add in your 20% of your $45K rehab cost.  Some loans require you make monthly payments until you sale, some just accumulate.  My guess is that most rehabbers want one payment at the end, and the lenders would prefer monthly payments.  Does that help?

@Jerry W. I think we are getting closer. This package does include loan for buying as well as rehab. I'm looking over my settlement statement from house 1 to understand this more. It looks like my 10% down (which was also EMD on the first flip ) was applied to my 20% down payment on my 80/20 Construction loan. With this being said, my 20% into the deal may be included in the total Rehab costs so I would have skin in the game. If this holds true, then I covered myself in my rehab costs. Does this make sense? If you beg to differ, please elaborate to understand. Thanks for your reply!

If total loan is $132K then 20% down would be $26,400 you would need down.  Your holding costs are normally accrued interest and misc expenses like utilities.  They are important as they are part of your cost, but not part of your rehab cost.  Normally you borrow enough to pay those as you go.  

@Jerry W. ,

I am following you 100%.  Where does the 20% get factored in?  Maybe that is the question I am looking for?  It may be a simple answer, but if that answer is provided, I think that is whats holding me back.  Again Thanks Jerry and everyone else for responding!

You'll have to ask your Lender if their 20% requirement is 20% of purchase price PLUS 20% of the rehab/holding costs that you are also borrowing, OR just 20% of the purchase price. Cheers...

The 20% is your Initial Cash Investment.  It's not an "expense".  Be sure a property needing this much rehab is in "financable condition".

@Brent Coombs , @Wayne Brooks ,

Thanks for your replies.   So say this for instance, If profit 23,000 on this house and my 20% of my 80/20 loan = 26,400 that I need to invest to my lender, do I only Net a final profit of $3,400?  This should answer what I am looking for.  Thanks all!  

So I think I figured this out and it may have been a blonde moment after all.  Regardless 20% in, in the long run, that money is returned back to me through the proceeds therefor the 20% is not kept by any party.  I found out that my 20% was towards the Rehab costs that I initial accounted for in the MPP formula.  With everyone's help, I was able to reverse think this one through and confirmed with my closing statement.  

On the other hand, we got an accepted offer on this new property.  We offered 80 with seller covering 2K of closing.  Needless to say, If we stick to our plan on this one here is the layout:

Purchase Price: 80,000
Renovations Costs: 40,000
Holding Costs: 25,000
Sale Price: 179,900 (Active comps at 179, recently sold comps at 219-239)
Projected Profit: 35,000

Let's keep our fingers crossed.  Thanks everyone!

$25,000 seems a lot for holding costs. Do you mind separating out those cost estimates here?

ie. Accumulated interest = ? Utilities = ?, and Insurance = ? Anything else (specify) = ? Cheers...

$25K is high for holding costs, but better to figure high than low.  I don't see a figure for your cost of selling the property.  Probably somewhere between 6% and 10% depending on what realtors charge in your area and what buyer costs you cover in closing, so $10,800 to $18,000.  You might look into that.  Good Luck bud.

@Brent Coombs , @Jerry W.

You are correct, it is a lot, however it may be the way I factor my numbers.  I include my Commission Payouts into my Holding costs/Fixed costs.  Anything I don't touch that get's paid out (Accounts Payable less construction/reno costs) during the 6 Months (God forbid it doesn't take longer than 6 Months in anyone's scenario) get's factored into this number.  I take J Scott's MPP and work off that.  My Rehab Costs is a running total from another sheet that contains all my receipts for every dollar spent. Here is an e.g. for this home:

Time to get the EMD to the Tile Company. Thanks gents! Have a great Weekend!

Hey @Rick Turman , excellent.  You just put your closing costs into your holding costs.  That works.  Good job and good luck.  Please shoot us a tell on how it comes out.

@Jerry W. ,

I have some good new and some bad news. The bad news is, I had two mold inspections done on the property today as I knew there was mold in that home but didn't know how much. With HUD you have 2 business days for HUD to receive a copy of the EMD and the contract. Make sure you have your inspections done before your offer and or EMD is sent so you have an exit strategy.

All in all looks like we need to do a full remediation in the home, crawlspace, and attic.  First quote was 6500 with us ripping up the underlayment just so the subfloor could be scrubbed and treated from the top and underneath in the crawl.  Second quote, 15,000!   Of course the higher quote was for the big dog disaster company.  The other quote company (Local mom and pop shop (Licensed)) felt more friendly and explained everything thorough.  Add 2k for the lower quote and they will demo the floor.  

Good news, I had the agent hold off on sending the signed contract and EMD to HUD until I had my inspections. Now that I have them, i'm trying to get them to agree to lowering the price Or I am walking away unharmed. It's a win win for me, and I think we played our cards well on this home. Keeping everyone posted. Will find out more tomorrow morning from my broker. Cheers!

So the quotes did not come in until this afternoon which cut timing real close. According to HUD, you have 2 business days to get the Executed contract and a copy of the EMD in their possession and well, today would be 2 business days. But i'm glad I stalled.

I may have siked myself out but redoing my numbers over and over again.  After looking at the quote from the least expensive bid to mold remediation, it looked as if half of it could be eliminated by my demo crew as there would be no need for it to be removed by the remediation crew.  However after running these numbers and re-running comps, i'm going to play it on the safe side and step down. 

I decided to rescind my bid for this property with HUD. I know 15k may be a good profit but it would be real close. You're always winning if you're making a profit however, I would like to see my family more than I did with the last flip, and I am not going down that road again. Who knows what else we would get into once we started.

Time to continue looking and move forward on this venture as this may not be the one, but the one is out there and I can smell it.  Thanks everyone for reading and commenting along the way.  Cheers to success!

@Rick Turman , you could always drop your offer by the $15K and send HUD the high bid. If they take it then you can use the cheaper number. Why not try it? It might make you an extra $8.5K.

My guess is that this was not a HUD home but a foreclosure that was a reverse mortgage. All HUD homes that are listed at hudhomestore.com the earnest money is only $1000 for properties over $50000 and $500 was below $50000.

If it was a reverse mortgage, the em could well be 10% and by rule has to be sold for basically list price(95%) for the first 180 days on the market

@Jerry W. ,

I'm not quite following you here. Do I notify HUD through my agent to drop the offer 15? Can I do this before they receive my contract and if they don't and EMD funds are in transit to them, worst case is they keep my EMD correct? EMD was only 1K. the value was over the 50K mark so it made for the 1000$ EMD.

I've put a lot of thought into this for the past few days, and yesterday would have been my 2 business day cut off.  I even sent an email to my agent to rescind my offer on that property.  If this is easy as re-submitting my offer prior to accepting the contract, maybe I can catch them before they pull it.  Or should I let it run it's course and re-submit? Sorry for all the questions, just think I may have let this one go, but there will be others.   Thanks Jerry, and thanks @Greg H. !

@Rick Turman

You only have 2 options :

Accepted the bid as accepted by HUD

Cancel or do not turn in your contract within the allotted period and rebid when the property comes back on HUdhomestore.com

@Greg H. ,

That's exactly what I had in mind.  Re-bid when it comes back on hopefully 10% or so cheaper.  It's been on that site for over 180 day's or so.  So it should be past the 95, 85, 75% discount that I have I hope they allow me to put in another offer since I backed away from the past accepted offer.  Will let you know the outcome.  Thanks Greg!

Morning guys,

Updating everyone on this progress as I forgot to mention the property came back online to the HUD site. Within 24 hours, I provided them with a new offer despite the mold remediation and dropped the offer by 10K with Seller paying 2K closing. Total offering of 68k. HUD accepted and now I am currently in Escrow. Closing should be ready for a nice early Christmas Present :-) Thanks for all the words of wisdom, and stay tuned for more updates. Happy Thanksgiving!

So I confess.  I didn't realize that I hadn't provided a final update on this property.  The short of it was, we turned the property in 2 months, and had pretty close to a full asking price offer within 3 days on the market and within a week and Earnest already submitted, the buyer wanted to bail because according to the neighbor told her I didn't know there was termite damage :-).  There are rarely Termites in our region and we had that whole place gutted.  O well, we made 500$ on that bail and continued on to the next offer.  

Within 4 days from relisting from the last bail, here came our next offer which was a Cash buyer, and was about 5K less than what we wanted, however they didn't ask for help with closing, and wanted a fast close so we accepted.  

We had roughly 57K in Renovations, bough the property for 68K, and sold for $165,500.  After holding costs, Commissions, and closing costs from the purchase, we turned around $25k in 2 months. 

With all said and done, just wanted to thank you all for your comments and support through the process.  Properties are getting swallowed up fast out this way, so it's time to move into Rentals!

See you all on the flip side!

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