First Time Flipper SFR with SOLO 401 K Funds

6 Replies

Hello:
I have come across an opportunity to finance as a lender with a flip for Single Family Residence (SFR) lake from the property with Solo 401 K.

Not sure how? to go about with (a) Due Diligence (B) contract with the General Contractor (GC) who has first position lien and on the SFR (c) Terms, (d) Contingencies that I should be aware of in the event of delays, Cost overruns, Fire, Flood, Thunderstorm, Burglary, and Destruction of property (e) Different Exit strategies depending on the situation

My Ask: I'm looking for a referral with the TItle Company in Michigan or Real Estate Attorney who could put this deal together and navigate this deal and put the contract together

Background:

The GC got into the cash for keys program with the owner of SFR who had a mortgage with a bank. GC paid the $$$'s (not sure amount was exchanged, waiting for additional info.) GC proceeded with the Rehab, the homeowner would not vacate. In July 2021 Sheriff's sale is expected to occur where the GC would take possession of property that is currently vacant.

Ask by the GC: Come in as lender to finance the Rehab.

Current Price = $ 180,000.00, Rehab = $ 50,000.00,ARV = $ 320,000.00

 My initial thoughts are as follows:

Go into a JV or partnership with the GC get 25 % equity into the deal, finance the Rehab as a lender from SOLO 401k. Double my money with interest annualized 15% interest for the duration of the rehab until sold.

Contingencies:

The property needs to completed within 30-45 days, put on the market, and sold by 60 days

My solo 401 K is the second lien on the property.

The property if not sold within 60 days the GC shall sell the house to me for the negotiated purchase price of $ 270,000.00
Property to carry umbrella policy to replace man-made and natural calamities.

Should the cost overruns increase the lender's equity will proportionally increase.

Is this a win-win for both parties if the deal goes south if the GC doesn't keep his end of the bargain of completing the project within 45 days and not sell in 60 days?

Constructive ideas and suggestions would certainly be appreciated.

Thank you

Best Regards

Kishore P

Second position loans are about as risky as it gets, @Kishore P.   Your loan could easily get wiped here. And don’t even think of getting loan docs from a title company. Title companies have lawyers, but they are not your lawyer. Nor will they provide a complete loan package that adequately protects you. You need a lending lawyer (not a real estate lawyer). This link will give you a sense of the documents that are typically required for a real estate loan.

On the other hand, since you mentioned you have enough money to buy the property if the deal goes south, you might consider a 50/50 partnership. Here your 401k plan would buy the house outright and it would also fund the rehab. Written by a real estate attorney, there would be a partnership agreement in place between your plan and the contractor. Your plan would pay all the bills and you would maintain all control and all accounting.

When the house is completed, you would sell the property and split the profits 50/50 between your 401k and the contractor. If your contractor does not perform, you could fire him and pay perhaps a nominal finder’s fee or nothing. After all, he’d be leaving you with a busted flip.

This is much cleaner and easier than negotiating a shared appreciation mortgage of some sort and relying on him to do the accounting. You will have the most control and also make more money.

Best of luck to you, Kishore.

@Jeff S. I Appreciate your time in responding to my post as well as elaborating on your explanation.

I have additional follow-up questions if I may, If I'm funding a flip my equity share $ 50 K (Rehab) would be approx 27 % of the Project. Whereas the equity of the GC is $ 180K, ie., 78 %. I don't understand how? the 50-50 JV work in this scenario. Pl. explain

Thank You

Best Regards

I tried to recommend a safe and simple alternative to this deal as a partnership, which would protect your 401k plan with 100% property ownership and a fair profit split with the contractor. With no cash outlay, it would be low risk to the contractor and keep you from a dangerous second position loan. It would also eliminate loan expenses, which can easily eat 1/4 to 1/3 of the profit. I think, what you are proposing instead is a seemingly one-sided shared appreciation mortgage of some sort with terms that are not fully thought out to me.

Assuming this contractor can really complete a $50k rehab in 45 days, do you really think it will sell (close??) in 15 days? And how would you force him to sell it to you if it didn’t sell on the open market? What if there were mechanics liens? Or substandard work? Would you want the property? What would be your plan?

Retirement money is the most valuable money you own considering the time value of tax-free growth. Do you actually know and respect this contractor? Is he someone you really want to trust with your 401k funds? And, in 2nd position?

“Double my money with interest annualized 15% interest for the duration of the rehab until sold.”

How exactly do you double your money in 60 days at 15% annualized interest? Two months at 15% on a $50k loan works out to about $1,250. Are you seriously putting $50k in retirement money at risk, in 2nd position, for $1250?

I could go on, @Kishore P. , and I’m sorry to be harsh, but I truly don’t understand your thought process here.  With all due respect, you don’t know what you’re getting into, are setting terms that are probably unenforceable, and you’re taking risks you don’t have to.