Lump Sum Payment at Closing - Reality?

Question

I'm a new real estate investor and to date I have assigned two contracts. I really want to take on a rehab of my own, but like many people, money is a major obstacle. I have a team of contractors lined up, my A-Z game plan, but I just straight up can't afford the interest-only monthly payments from lenders. I'm told that some private lenders will do a lump sum payment once the house is flipped, but pitching that deal structure to an investor when I don't have a portfolio of work AND have never worked with them before is a hard sell. Am I in fantasy land thinking that somebody out there will lend 100% of purchase & rehab costs and also be ok with full payment after closing? Even though I'm confident in my numbers and in my ethics, if I put myself in the investors shoes, it seems very risky. Has anybody ever started out in my position and found a lender who was ok with those terms? Do I need to get a grip on reality and rehab when I can afford the monthly payments?

Thanks in advance!

Jeff S. · Answer

This is almost the only loan we do anymore. Most everyone who flips a lot of houses runs out of money.  After one or two successful deals with us, we will loan with everything payable upon sale of the house.

The problem you’ll likely face, Robert, is that you have no money and no experience – red flags for most lenders.  Even with a killer deal, no one wants the hassle of foreclosing and no one I know would want the house.   I agree you're best to partner with another rehabber. 
 
We were approached not long ago by an agent who had an amazing deal he wanted to borrow on to flip.   He had previously flipped a couple of homes but really didn't have the experience we were comfortable with.  Nor did we have any relationship with him.  We approached one of our borrowers, who happened to have other properties in the area, and they teamed up.  Now certain the deal would be successful, we loaned the agent the money under the same terms (100% loan, all in arrears) we normally loan these  existing borrowers, who are funding the rehab.  They will split the profits and we're all happy.

In your position, I would not only talk to other rehabbers but talk to lenders for referrals, not money.  If you can get great deals, you can partner with others and leverage their reputation and relationships to obtain money.

Jeff

Account Closed · Answer

Jeff S Well, I can't disagree that I don't have enough deals.  My husband is right there with you and would be so happy to know that you agree with him.  I'm mondo conservative about values, which has been great for the bottom line, not so great for overall income. I'm trying to break out of that.  Right this minute I'm OK.  But if an amazing opportunity comes through next week, the juggling act begins.  I have sales that scheduled to close in the next few weeks, and if they didn't, I'd have to move around money, make some calls....You know how we deal makers are.

Account Closed · Answer

Jeff S  I may be coming to a rehab near you.  Stay tuned.  :)

Joshua Dorkin · Answer

Folks - Please refrain from deal making or posting solicitations here in our discussion areas.  The ONLY place where that is appropriate is in the Marketplace.

Dell Schlabach · Answer

Thats how our loans are structured to ...

Purchase money+money+rehab money+holding costs (insuran

Three private lenders, one full time "hard money" lender, and one local bank that lends up to at 80% of ARV. All fund purchase and rehab.

All my lenders get paid a lump sum at closing except the bank. They get paid interest monthly.

Dean Letfus · Answer

This is a common type of loan for investors in my city. Loan is acquisition + rehab + closing costs.  Paid in full on exit.

Jeff S. · Answer

With tongue firmly in cheek, K. Marie Poe, if you have any money left to flip properties, then you don’t have enough properties!!

Yes, 100% is for the acquisition.  We've been asked a thousand times if we’d loan the rehab money and generally said yes to anyone we've done a bunch of deals with, but everyone always seems to find this money on their own.

In our case, and maybe this is why, we’re not a fan of seconds and would only loan on the rehab if we also loaned in first position on the purchase.  We get very comfortable with our borrowers (and only loan locally, so I’m afraid we couldn't help you), but don’t want an unknown lender above and between us.

Jeff

Robert Jeffords · Answer

Thanks everyone for your insight.  I think the JV approach probably be the best avenue in my current situation.  Although I have a game plan, nothing beats experience and I suppose it'd be best to have a partner that could advice on certain issues when starting out.  Actually my attorney is a flipper as well and also lends at 8% when splitting profits ($30k min).  That's probably close to the best case I can get being a noob.  Now to find that deal with $30k+ profit!

Account Closed · Answer

Jeff: when you say you lend 100%, is it just for acquisition?  Or are you advancing rehab cash as well?  If you are advancing rehab funds, is it lump sum?  Or is there a withdrawal system where you are approving repairs as they are made?

I'm using lender funds, both secured and unsecured, for purchases.  But using my cash for the rehab.  I'm working in ARVs under $175K, though, so my funds can usually get the job done.  But it limits how much I can do at one time.

Will Barnard · Answer

Over 90% of my investor funding is balloon payment at end, no monthly payments. With that said, I have a track record and cash reserves. Starting without that is difficult.
My very first local rehab flip was done with 100% acquisition and almost 100% rehab costs included, so very little out of pocket, but even at that time, I still had an investment track record in buy and hold, land development and spec building.

Getting this type of funding is possible but very difficult. You will likely need to be speaking to family or friends to obtain such a structure.

Another option is the JV route. Find a person with the money and desire to do rehab flips, but not the time, perhaps a working professional with a career. Then you could offer them 50% of the ownership they provide all the money you provide all the management and finding the deal. Could work beneficially for both parties. Once you flip one, you now have money to use on the next one and perhaps go at it alone, or keep with the JV.

Lump Sum Payment at Closing - Reality?

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