I Can't get financing for a flip. Great credit, great down payment. Any ideas?

20 Replies

       Hi all, My name is Bob new to BP. I live in the Boston area, 15 minutes south of Boston. I am trying to get financing for my first flip, and have been shot down by 3 banks for a 30 year fixed rate ( not sure if this is the right approach). I talked to a hard money lender and he said he would give me some financing with 2 points, and 12% interest, I did the math and it seems like I would be paying 10k to borrow the money for 6 months, and more than that if I borrowed longer. I have a credit score of 776, I have 70k in the bank, 112k in my annuity, although annuity doesn't seem to matter to the banks I've talked to. I work fulltime, same company for 10 years. I make about 70k a year base pay. Here is the tough part, I own my primary residence (purchased for 341k, and owe about 270k now), and also have a rental property in NH (purchased for 125k, and owe about 90k) that shows a loss on my taxes. I am married and my wife is a nurse but she wants nothing to do with a flip so I understand. As odd as it sounds we don't combine our money. She makes what she makes and the same with me. We only pay mortgages, and bills together, and we file taxes jointly. It has been a perfect system for us. My credit card debt is low, 4k max. I have been wanting to get into the real estate market for years, have done years of saving, and researching, I have about as strong of an understanding of flipping house as you can without actually doing one. I have a sound mind, college grad, great work ethic, no slouch here. Anyone out there that can give me any ideas? I'm not looking for anything gimmicky or something that over extends me. Any info would be appreciated. I was hoping to have a house on the market by May, but now I feel like that is dwindling. Ok thank you for reading.

You may be able to find a small local bank who will be willing to work with you, but it is almost impossible to find one who will finance the purchase and renovation cost of a property these days. Your best bet may be to purchase the home with a conventional loan and use your cash to do the renovation. The hard money route is also viable, but be careful. As you have seen, it is very expensive.

Ok thanks for the reply. I don't need money for the repairs, I have someone who is helping me on that. I did try conventional loan, and tried 2 small banks. Here is another side question, would I be a cash buyer if I used a hard money lender? I would rather avoid using a hard money lender but if that is my only route I will, but just a set back on my end. I'm willing to bite the bullet if needed, but want to exhaust all options. What types of loans do most flipper use other than cash, or hard money? Again thanks to anyone helping or reading my post.

Find another investor to partner with.  That investor can bring cash to fund your project, and you can split the proceeds in some way.  If you find a hungry investor he may not charge an interest rate, and settle for half of the proceeds or however you decide to split it.

@Robert Anderson it sounds like DTI is the hurdle you are facing with the banks. If so, there are set maximums that freddie/fannie backed loans can have and without the loss from your rental and without your wife's income it may be hard. The other issue you might have is telling them it is a flip. There is something called EPO (early pay off) that reduces or eliminates the amount the bank gets paid in commission if you refi or sell in a certain time period (usually 6 months)

The other options are a HML or even an equity partner where they give you the funds and you split profits 50/50. Try going to your local REIA and ask around.

Brie Schmidt, Real Estate Agent in Wisconsin (#57846-90) and Illinois (#471.018287)

Robert:

Look for investors at your local real estate investor association meetings (REIAs) who are willing to fund a good deal. The money you can get, the cost of the money, and the amount of profit you'll share on the back end will all depend upon your experience. Since this is your first fix and flip, you should expect to pay more for money which means you need to be sure you don't over pay for your purchase.

Traditional lenders are not the best source for this type of money as they have no idea what you'll end up doing to/with the property so the risk to them is too high. Private money is what you should be seeking.

Since this is your first deal, going it on your own may not be the best solution for you anyway. One deal gone wrong can totally wipe you out and take you out of the game. Another solution is to find and negotiate the deal, then take it to your local investor groups and sell the deal to someone there. Even if you only make $2000-$5000 for it, you begin to build experience and credibility. You can, perhaps, help with the renovation to receive some of the profit. That way, you have someone guiding and teaching as you learn and someone to share the risk.

Judging by all the inexperience in your question, I recommend you do not do this on your own. REIA meetings and local landlord association meetings are great places to meet others who are doing exactly what you want to do. Following them will save you a lot of mis-steps.

Is it viable to scale back and do a smaller project? 70K cash could certainly get you in the door somewhere in my area. If it were me I'd be looking to borrow maybe 20K more somewhere, which may be easier to find (and cheaper to carry), but I have no doubt others in Philly have managed on 70K all in. Deferred interest credit cards would also be a possibility which is safer with a smaller amount borrowed. Once you had a profit from the first flip, you'd be able to reinvest in increasingly larger projects. However if nothing in that price range is possible near you, you'd be looking either at a long commute or remote management (the later of which I've never considered personally but is covered elsewhere on BP I believe).

You don't state how much you wish to borrow or an details of your flip. You do state it will cost ~$10K to borrow the funds from the hard money lender. That may seem expensive but if you have a great deal and clear $50K on it you may be glad you did it. What if you clear $80K? You have to decide what a reasonable return is but if you need the funds to do the deal you will have to pay for them. Will you be better off if you do the deal or not?

It will be more expensive and more difficult to borrow because of your inexperience. The lender will likely have more to lose on the deal than you. They will analyze the deal before making any loan. If your plan is not sound or there is not enough equity in the deal they will not lend. Frankly, it sounds like you may be better off having a relationship with an experienced investor and your lender may be that person.

Work the hml numbers into your offer/deal and it won't be much of a problem. You have the reserves necessary so calculate the $10k for the hml into your offer and leverage yourself that way. You can also find an equity partner but if it were me I would be leery about putting up the money with a novice investor who I don't know if I were the partner. HML may be your best option and you are getting good rates for a hml. You won't be able to say it's cash but most seasoned Realtors and asset managers know about hml and the way it works so it won't be a major draw back (although cash is always better).

30 year conventional financing is not the property route for a fix and flip.  Buy and hold, yes.  But for a fix and flip you need a construction loan.  Construction loans are not easy to get and few banks offer them.  Most fix and flippers use their own cash, hard money, or money partners.

Hard money may be a better choice. HMLs care more about the deal the your personal situation. Your credit seems OK and you have cash. For the right deal (which you've not described) you should be able to get HML financing.

The rate and points you're being quoted are actually pretty good. 

Hard money is still a loan, so you would write offers as financed.   Not cash.

You've said nothing about your deal. Describe what sort of deal you're trying to do. I gather you're trying to borrow about $125K. So, I assume your purchase plus rehab is about $125K and the ARV for the property is about $175K. Sound about right? With $70K of your own cash, that should be a very financeable deal.

Taking on a money partner is usually MORE expensive than hard money, so I can't recommend that route in your situation.  Where you might want help is in actually choosing the deal and doing the rehab.  New fix and flippers often don't realize the full costs, so they think they have a deal when they don't.  And they underestimate rehab costs.

You sound like you're planning to do the work yourself.  That's fine for paint and minor stuff.  But if you're doing electrical, plumbing or mechanical, you need permits and that usually requires licensed subcontractors.  Might also require using a licensed general contractors.

A hard money loan costs less than a partner, @Robert Andrews .  Run the numbers to see.  And if you shop around, you may be able to do better than 12/2.  The key is to find someone reputable, don't get hung up on the interest rate, which is important, but can be less important than the terms for a short term deal.  Hard money lenders as a group have poor reputations, but you can find a few of us who people trust.    You can ask around at your local investor group, get one with good recommendations, that is key.

Keep in mind that conventional residential lenders are not interested in short term flip loans, for reasons that Brie mentioned as well as not making any money off a short term loan at lower interest rates. 

As Karen mentioned, you might want to consider selling this deal at an investor group if there is enough room in the deal. You just missed EasternMass REIA but I certainly welcome you to Black Diamond to promote your deal on the 27th. @Mike LaCava and @John Fossetti run one in Plymouth, check with them also.  

@Robert Andrews  Welcome.

At all our meetings (site in signature below) folks introduce themselves and there's at least one Private money Lender. We're covering "Stake out Your Territory" on the 27th among other topics.

Usually Private money folks start at 15/5 then go lower as they get to know you (track record).

How much research did you do if you thought you would be able to get a 30yr fixed conventional mortgage on a fix and flip???

So do you actually have a deal to buy or just trying to get financing setup before putting in offers?  If you haven't put in offers yet then it is good to try to figure that out.  If you have something lined up I'll guess it isn't a deal since you actually have the time to try to figure out how to finance it.  Real deals don't usually have long financing contingencies on them.

Regardless Hard Money is probably your only option unless you have some other less expensive private lending options, i.e. friends or relatives that will give you a$$load$ of cash without worrying about you lack of experience. 

For HML 12/2 isn't bad at all. About as good as you will do, especially on your first deal.

Good luck to you!

Listen to everyone that is telling you to go to the local meetings to meet people and learn.

Shaun Reilly, Real Estate Agent in MA (#9517670)
1-800-774-0737

I just want to thank everyone so far for all the advice you have given me. It  motivates me. I appreciate it.

@Robert Anderson, I would say that these are just issues that crop up when you're trying to do your first deal. I would also say that your best move is to adjust your perspective and take a slightly different approach.

Your first deal is always going to be a pain and if it's not one thing, it's another. While a partnership is always costly, it's really hard to make money on your first deal playing solo and very few of the experienced flippers on here can honestly tell you they made money out of their first one. This is a risky business and mitigation of risk is at the center of it. 

If you can find an active and experienced partner who will allow you run this deal hands on for the experience I'd say that's an investment in your future, even if you end up making less money out of it. Getting your first deal across the line is worth a lot to you especially if you're in it for the long play. 

Think it through, make a plan that you know will work and go after it. There are plenty of deals out there, your first deal is just one of them. 

Best of luck.

I also am in your market and do flips. Another option would be to partner with someone who can get the bank financing. When I first started, I could pay cash for the property and couldn't get a loan. (Go figure). Now I can get bank financing for my flips at today's low rates. Part of what the banks are looking for is your liquidity (how much do you actually have in the bank) and another part is your experience. Partnering with someone for your first one could help you gain the experience that you could then use on your 2nd one. It would decrease your earnings, but would allow you to get started with less risk.

Talk to some small local banks that do commercial loans, and as someone mentioned before ask for a product like a construction loan. This is the sort of product where you can start to find financing that takes into account both purchase price and rehab costs.

3 options:

1 - Local Credit Unions. They are usually able to bend the rules a bit where banks can not.

2 - Money Parter/ JV Partner. Partner puts up all the money and you do all the work tying up the deal, managing the flip, and reselling the property.

3 - Hard Money, and pay that 12% and 2 points.

Look at it this way: YOU ARE NOT LOSING MONEY USING A HARD MONEY INVESTOR

Here is why.

If that is your ONLY option and the deal really does pencil out, then you will still make a profit. If you personally had the $200,000 to make the flip yourself, sure you would gain an extra $10,000 on the deal, but if you never jump and never close the deal does that $10,000 really matter!?! Would you rather have $20,000 (It would have been $30,000 if you could self fund it) or $0 since you didn't want to make your lender any money?

I am NOT a Hard Money Lender, but I personally battled over the idea that I was giving someone money for doing no work. Turns out, thats the benefit of having the money to put in high risk high reward situations!

Don't limit yourself by seeing the potential loss, jump on the potential gain.

Is there somewhere nearby outside of your area where your 70k could flip without needing any additional money? "Being the flipper" is only one side of the coin, perhaps finding your local REI association, and instead of flipping, you could be the lender for smaller projects.

There are some very good comments here.  In all fairness, your hard money option is reasonable at 2/12.  As a private lender, I've found that borrowers shop hard, and not charging points has presented me with opportunities that would have otherwise passed me by.  Considering the time and effort to locate good lending opportunities I think most private lenders are approachable.  It's fairly pretty simple to identify them via county records, or buy a list, and reach out them.  As a word of caution, you need to make yourself aware of the SEC laws regard this approach.

As a side note to fix and flip opportunities, keep in mind that contractors may view you as a one time job vs a steady flow of work, and as a result they may not make your job a priority.  Time is money, and when you're borrowing it can get expensive.  Vet contractors well by checking references, get bids in writing and make sure you have a clause to protect you if the contractor takes longer than they agreed to.  Make sure the note has a an agreeable extension option to prevent putting yourself in a bad position if things take longer than anticipated.

Originally posted by @David T. :

@Robert Anderson, I would say that these are just issues that crop up when you're trying to do your first deal. I would also say that your best move is to adjust your perspective and take a slightly different approach.

Your first deal is always going to be a pain and if it's not one thing, it's another. While a partnership is always costly, it's really hard to make money on your first deal playing solo and very few of the experienced flippers on here can honestly tell you they made money out of their first one. This is a risky business and mitigation of risk is at the center of it. 

If you can find an active and experienced partner who will allow you run this deal hands on for the experience I'd say that's an investment in your future, even if you end up making less money out of it. Getting your first deal across the line is worth a lot to you especially if you're in it for the long play. 

Think it through, make a plan that you know will work and go after it. There are plenty of deals out there, your first deal is just one of them. 

Best of luck.

 I couldn't agree more with David. Getting that first deal across the finish line is more important than a higher profit margin. We work with partners a lot of the time; this means less capital outlay for both parties, and a since of community while working through the project. I would highly recommend partners.

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