If I Use A HML To Fix/Flip, What Costs Can I Expect To Incur?

9 Replies

Hello BP,

I'm looking to get started looking for my first property to flip very soon. I will be using a HML that wraps all points and fees into the loan, and hopefully will have no interest payments for the first six months. I'm wondering, what costs can I expect to have to pay out that WON'T be covered by the funds I have from the HML?

Thanks in advance.

-Jason E. 

Jason, doing a first time flip with hard money can be very tough and not for the faint of heart. Assume it will cost you at least 10% of the retail value of the property (ARV.)

Good luck with it.

If you can find one that will wrap all points, fees, and payments into the loan then you should just have the appraisal as far as the HML part. You will have other costs, though, that aren't related to the loan. Inspections, termite certificates, recording fees, utility fees, title company fees, etc.

You will very likely have significant cash out of pocket needs, even if the HML does this. Points and payments on a six month loan can easily be 10% or more of the amount borrowed. So, that reduces the proceeds of your loan to 90% or less of the amount borrowed. If that covers rehab and purchase you need a screaming good deal to avoid having cash out of pocket. If the HML lends 70% of ARV your purchase plus rehab would need to be 60% or a bit lower to avoid being out of pocket.

Also be aware that most HMLs will hold most or all of the rehab budget in escrow.  So you will need to cash to do the work.  Then it gets inspected and you get a draw on the rehab escrow.

Can you give me an example of these expenses and what they might cost? I can't think of anything other than construction estimates and inspections. 

Hey Jason, 

Here is what Hard Money would cost us:

13.99% loan for 6 months

3.5 points upfront

They hold the repair costs and reimburse after inspection (each inspection is $150)

Loan up to 70% ARV

So an example would be :

ARV of $100,000

Purchase Price: $60,000

Repair: $20,000

Points: 3.5% of 70,000 = $2450

The HML would lend $70,000 and would hold back $20,000 for the repair. This would mean you would get $50,000 upfront and would have to bring $10,000 + $2450 + Closing Costs to the table to close on the property.

Then you will pay the interest only loan of 13.99% of 70,000 which would be $757.75 per month. 

As you can see the prices add up quickly and if you dont account for them in the evaluation of the property, they will eat through all of your profit. There have been many deals we have had that were a good using cash, but turned into a losing deal using Hard Money. 

I am new to this, so if i have made a mistake anywhere or need to be corrected please feel free. 

Thanks

Craig

things may be different as I am in Texas, but here some HML will make you do a survey $350ish, some may require an appraisal $300-500, some may have some doc processing bogus fees $500ish. You need to check on all the closing costs you have to pay that should be standard whether you are doing HML or regular conventional loan closing. Also, don't forget to check on Home Owners Association Fees, or HOA transfer fees, Insurance costs.

John makes a very good point about paying for rehab costs while you wait on your draw from you HML. an example, I just paid $7k for foundation work. To get a draw from my lender, I have to show post repair Engineer report and copy of warranty. My foundation company will release the warranty copy once they are paid. I have to pay $7k and float that while I request the draw for reimbursement. Those costs can be significant depending on your project and how your contractor is starting & finishing & how your payment structure is set up.

Some other examples I've run up against, the contractor wants a draw to pay for materials for flooring materials ($3k). The flooring won't be done for a week or two, so you need to pay that now so he can order materials, get them brought house, sit there for a few days to acclimate, then install. You have to have that $3k available for the materials. HML won't typically pay for materials that are purchased and not installed. For me, the answer has been credit cards. They give me that float, don't tie up my cash, and I get tons of points. Just be careful to pay them off.

Unfortunately my credit limit between 3 cards is about $1,000! Haha. I thought this as a means to get the medical bills off my credit report and get back to a 720, but clearly that is not going to work!

I'll be taking the agent or wholesaler route. That will help me build cash for true REI endeavors.

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