Excited about first flip until now..HELP!
Real Estate Investor · Langhorne, PA · Member since 2014 · 36 posts · 8 votes
Excited about first flip until now..HELP!
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Investor · Somerset, NJ · Member since 2012 · 47 posts · 43 votes
12yHey Chris,
Just my two cents here. I Also get 100% financing on some deals, expensive but I do use it. From my experience with dealing with contractors, and I've been rehabbing for 13-14 years now. I typically don't pay them upfront. If I know them very well and they happen to be short on cash, I may throw them some change to get started. However, rehabbing homes is so popular now and there's so many hard money lenders out there that contractors usually know how the game works. If your contractor doesn't, it should be fairly simple to find a contractor that has worked with investors that use hard money lenders. Contractors that have, will understand and feel comfortable with the fact that you get your money in stages from your lender. I let my guys know that I get a draw every Friday from my lender for the work that was completed. I tell them if you do $10k of work that week, then you will get paid 10k. It's that simple. Also it will help them feel comfortable with waiting as long as you have written agreements with them stating the terms. Being that this is your first time, you should also talk with your hard money lender and let him know that you will need his complete cooperation during this rehab. I.e if you show him $10k of work was done, tell him please make sure that he pays that. This way everyone will be paid on time and the job will get done on time. This way everyone is happy.
Try these options also, to stay in budget. This works for me. Sometimes GC's may not have the cheapest prices for the entire job. I find that drywall contractors will give me cheaper prices per board than my contractor. I find that hardwood floor contractors know how to price jobs better, because that's all they do. Roofing companies etc.. painting, you can get away with sometimes.
Also with material, try and buy as many discounted items as possible. With most major holidays, you can save hundreds of dollars on stainless steel appliances from Lowes and Home Depot. Even if you're not ready for them, order them and just have them delivered at a later date. Visit a paint store like Ben Moore or Sherwin williams and ask if they have any oops paint or discontinued or discounted paint. I just purchased some discontinued paint from Sherwin williams today. Usually $28 per gallon, I paid $5 per gallon. Same with roofing and siding suppliers. Always ask first if they have any close outs. There are times I've paid less than $60 per sq. on shingles that cost more than $90 per sq. same as siding. Everyone who posted before me has great advice. You should be able to take something from all of us and make this project a huge success. Sometimes 100% financing with hi interest is all you can do at that time. If you a happy with your profit at the end, being your first deal then I say go for it. Just chime in bp once in a while if you get stuck. Remember, STAY IN BUDGET,
All the best
Corey
59 Replies
- Real Estate Investor · Langhorne, PA · Member since 2014 · 36 posts · 8 votes12y
As a matter of fact I was just turned on to the local REIA group by a local lender, definitely going to check them out.
Thanks, I may have to change my approach, do know a few subs personally that I went to high school with, maybe I'll connect with them and see if we can do something.
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
be sure that you let those working on the house Know you have a lender in place and they will get paid through loan proceeds.
- Real Estate Broker · Indianapolis, IN · Member since 2014 · 3k+ posts · 2k+ votes12y
While I am out of state we do have a HML that will do 100 %. He charges 6 points and 1.25 % a month for up to 11 months. How he has it set up (may be worth asking your HML about) is that he pays the contractors in sections. We send him the "scope of work" and the estimate for each section. When they get done with a "job" he walks that section (take like a kitchen for instance) to make sure that they completed it in accordance with the agreement. He then "signs off" on that part of the house and they are paid for that room. It keeps the contractors honest (on budget) and he makes sure his money is being used well. It works in his favor because ultimately a well done home is more likely to sell. The more likely the property is to sell the more likely we all make money and repeat the process. Just my 0.02
- Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes12y
In my market I could resell an $180K ARV property needing major rehab for $100K. Given that you have to pay for both your purchase and rehab funds, I think you may come out ahead by selling it as-is.
If the market is as tight as you say it is and your values are accurate, you could do very well on it with no rehab.
- House Flipper · East Stroudsburg, PA · Member since 2013 · 1k+ posts · 205 votes12y
You might consider working out with the lender to have the sub contractor put on the "draw slip' and pay him for their portion of the work completed. This will indicate to them that" when you get paid they get paid". It may give your sub constractor some assurances that the money is available when his work is completed. Food for thought.
- Real Estate Investor · Langhorne, PA · Member since 2014 · 36 posts · 8 votes12y
Thanks guys, I explained to the contractor exactly what you guys are saying however he just looks at it like he's always going to be behind, even if it's just a few days. He just doesnt want to be behind the 8 ball at all, probably because he doesnt have some kind of reserve of funds or the credit to keep things going. I know there has to be contractors who will work under this system, I'm gonna just keep looking.
- SFR Investor · Dallas, TX · Member since 2011 · 604 posts · 243 votes12y
To complete a $50k rehab with $0 cash on hand is going to be a challange,, I've used hard money lenders several times with very little out of pocket when the job was completed, but I was out cash along the way to pay contractors until I got a draw.
If it was a short rehab it would be easier, but most hard money lenders won't give you a draw until a certain job is complete.
Try to leverage the Lowes credit you have,,see if you can get your hands on a few thousand dollars by selling something, it will make your life a lot easier than having contractors always mad because it is taking you longer to get a draw than you expected.
Are there any jobs you can do yourself and get a draw based on finishing those jobs? That might put some cash in your pocket
I'm not saying it can't be done, but you want to finish the project and have a positive relationship with the contractors and your HML,,if you can find a way to borrow some cash, it will save you headaches and money to bridge the time between you pay a contrator and get a draw
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Account Closed
the issue with ARV when you get out of the West coast is its best case scenario.. And those in the business know that a home will not sell for ARV like it will here on the west coast. I don't know this market in particular and it may work.. But when your talking most of the Mid west rust belt deep south.. ARV unless its new construction is very tough to get.
This is the trap that CA investors fall into when they go out of state they get told that the ARV is X but because your buying from us you get built in Equity of Y so on and so forth I am sure you have seen the marketing materials.. So investor thinks with a CA mentality buys and thinks they got this smoking deal when in fact they have paid at market or probably higher than market.. This is where the 2% rule kicks in locals won't pay more than a % of rent.. ARV is not done through a GRM.. its two different valuation methods.
Or in some really lower end markets Appriasial WILL throw in GRM to get a home UP in value. When you have the locals all paying 25k for a 700 rent
- Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes12y
Originally posted by @Jay Hinrichs:
@Account Closed
the issue with ARV when you get out of the West coast is its best case scenario.. And those in the business know that a home will not sell for ARV like it will here on the west coast. I don't know this market in particular and it may work.. But when your talking most of the Mid west rust belt deep south.. ARV unless its new construction is very tough to get.
This is the trap that CA investors fall into when they go out of state they get told that the ARV is X but because your buying from us you get built in Equity of Y so on and so forth I am sure you have seen the marketing materials.. So investor thinks with a CA mentality buys and thinks they got this smoking deal when in fact they have paid at market or probably higher than market.. This is where the 2% rule kicks in locals won't pay more than a % of rent.. ARV is not done through a GRM.. its two different valuation methods.
Or in some really lower end markets Appriasial WILL throw in GRM to get a home UP in value. When you have the locals all paying 25k for a 700 rent
Hi Jay. I'm aware of the moving ARV target outside of CA. It's why I mentioned it. If I were the OP I'd be very seriously looking at ways to cash out of the equity today....to see if there really is any. I might not sell and still do the rehab, but it's a good exercise to crunch the numbers and compare quick cash vs. rehab profit. If you can't sell an $180K ARV property purchased for $58K for decent profit as-is, then something is wrong with the numbers, the scope of rehab, or the desirability of the property. Or all three. It's just an exercise, and doesn't cost anything. :)
- Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes12y
Assuming the no cash will be an ongoing problem you probably need to leverage other credit.
First what I mean is that not only will the lender not front cash, they probably will want you to pay the interim bills then reimburse you once the inspect. Even if they will pay the contractor directly there may be a delay that will piss off your guys.
Best case is you find a contractor that will forsake a normal down payment if you buy that up to $12K of supplies at Lowe's to start the job. Then work out with the lender to get a draw based on buying the materials for the job. Pocket this cash and use it to float the other progress payments.
If they still want some amount of a payment it should be minimal just to cover a few days of up front labor for a crew for demo and that stuff. Since you don't have a relationship with them yet they probably will want to be covered for some of their payroll as well.
If you can't get the HML to agree to do the draw for materials deal you might have to leverage other credit. Cash advances on other cards is not a great option but you do what you have to do if the deal will work. Hopefully you can get something with a promo rate (I still get pretty frequent 0% advance offers) so you aren't paying a 4% fee and 20%+ interest on that money too.
- Real Estate Investor · Langhorne, PA · Member since 2014 · 36 posts · 8 votes12y
@Account Closed
What equity would I get out of the $58k house now in its condition? 5-10K to a wholesaler? I'm doing this approach to make the most money I can in the shortest period of time. As for the ARV I was actually conservative, similar home one street over with one less bath that was rehabbed nicely sold for $191k back in April.
I'm not sure what this west coast/east coast issue and arv are all about? This property is located in the suburbs of Philadelphia.
- Real Estate Investor · Langhorne, PA · Member since 2014 · 36 posts · 8 votes12y
Thanks, I was actually kicking that idea around, I need to talk to the HML tomorrow and push for either some up front funds or for reimbursement of up front materials.
- Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes12y
Originally posted by @CHRIS MITCHELL:
@Account Closed
What equity would I get out of the $58k house now in its condition? 5-10K to a wholesaler? I'm doing this approach to make the most money I can in the shortest period of time. As for the ARV I was actually conservative, similar home one street over with one less bath that was rehabbed nicely sold for $191k back in April.
I'm not sure what this west coast/east coast issue and arv are all about? This property is located in the suburbs of Philadelphia.
With a conservative $180K ARV and if the $50K budget is accurate you should be able to make $15-20K easy all day every day selling to an established rehabber. If you market is light on deals for them you could make a lot more.
- Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes12y
Originally posted by @CHRIS MITCHELL:
@Account Closed
What equity would I get out of the $58k house now in its condition? 5-10K to a wholesaler? I'm doing this approach to make the most money I can in the shortest period of time. As for the ARV I was actually conservative, similar home one street over with one less bath that was rehabbed nicely sold for $191k back in April.
I'm not sure what this west coast/east coast issue and arv are all about? This property is located in the suburbs of Philadelphia.
It's a test of your numbers. If the ARV really is $180K but it's only worth $58K in it's current condition than something's off IMO. You're spending $50K as newbie rehabber using a GC when other experienced rehabbers with their own crews will spend way less. Depending on rents, the property should interest DIY landlords.
If the property is actually in the $200K ARV based on size or better amenities, people would be climbing over to each other to buy it from you for $100K. Don't take my word for it. Test it. Trying selling it as-is.
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@CHRIS MITCHELL @Account Closed
I do not know your market specifically but the west coast MID west deep south and rust belt ARV issue is, that in my experience as a HML and financing wholesalers and flippers and owning over 500 of the mid west type homes. You can get an appraisal no problem but you will rarely if ever sell for anywhere near appraised value... and it could be your in a different price point I am talking sub 120k homes. Especially in cities and areas that are Heavy to TK investors... The marketing is all like this..
House ARV 90k
your buying from us for 75k
15k INSTANT Equity
So what is the home really worth what you paid for it or the ARV that was represented by the TK company or seller. and since these are off market no listed on MLS its hard to mine the data. Many an investor that has bought mid west based on this so called ARV only to find out the only true buyers are Wholesalers that will never pay more than wholesale there are no owner occ to speak of in these areas.
Were on the west coast like in our market in PDX houses sell for 100% of appraisal and within 1 to 2% of list price on MLS.. as a matter of course. and then you have the hot markets where stuff sells for over list and over appraisal.. although that is calming down a little from what I hear these days.
- Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes12y
Originally posted by @Shaun Reilly:
Originally posted by @CHRIS MITCHELL:
@Account Closed
What equity would I get out of the $58k house now in its condition? 5-10K to a wholesaler? I'm doing this approach to make the most money I can in the shortest period of time. As for the ARV I was actually conservative, similar home one street over with one less bath that was rehabbed nicely sold for $191k back in April.
I'm not sure what this west coast/east coast issue and arv are all about? This property is located in the suburbs of Philadelphia.
With a conservative $180K ARV and if the $50K budget is accurate you should be able to make $15-20K easy all day every day selling to an established rehabber. If you market is light on deals for them you could make a lot more.
Yup. I would have buyers fighting for that one. But most are working on even thinner margins here and I'd make more than $20K. Good examples of the margins many So Cal volume rehabbers are working with are available in Justin Williams thread about doing 150 rehabs this year. The volume rehabbers have cheap crews, do what gets the property sold in this seller's market, and have in-house agents for the listings. No branding, no staging. Some will be OK with $25K profit on a $250-300K house. I work with a lot of data so I see the buys and re-sales. There are crews working in my farms that consistently do 5-10 houses a month with extremely tight margins. We don't hear from those types of operations very often on BP. They are the competition for the newbie or low volume operator and drive the prices to where it's risky for those not doing high enough volume to absorb errors.
Wondering about the acquisition on this deal? Was it offered on the MLS?
- Real Estate Investor · Sebastian, FL · Member since 2014 · 812 posts · 432 votes12y
Originally posted by @Edward Briley:
@CHRIS MITCHELL Some more advice you may not want. A good idea is that the day you start rehab on the property is to put a "For Sale By Owner Sign" in front of the property. You may be lucky enough to find a buyer, before you hardly get started with it, that may buy it providing you do it the way they desire. I have known this to happen with two others I know. I have never been that lucky, but you may be.
Bad move. You are more likely to have a potential buyer look and figure it is too far gone.
- None · Virginia Beach, VA · Member since 2014 · 126 posts · 50 votes12y
Hey you all, and even myself gave me an idea while reading the post. I have been buying houses, and getting them to basically decent to rent them out. This takes at least a week to do. I am going to use my "For Sale by Owner" and place it in the front of the home while I am working on them. If I get an interested buyer for the property, and can make a profit, I will sell it rather than rent it. Hey, if I can make at least 10 grand in a few days, and only do some cosmetic work, that is the way to go. If a contract buyer wants more, I can accommodate that also. Here the real estate market is really bad. Their are many that want to buy homes, however, unless they have stellar credit, they cannot get a mortgage. The real sad part about this, is that this is a military area. Many repo's around here do not need any work. The ones that do are hard to find that will flip fast. I really believe that the problem with selling real estate here, is more the agents than anything else, because they are in constant battles to obtain their next million dollar listing. A two hundred fifty thousand or less home is not worth their time. And when you put one up for sale they will tell you that you are better off renting it than trying to sell it, unless you are willing to finance it yourself. I am thinking about moving to Detroit for a while.
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Account Closed
dead on target K regarding west coast ... our market here in PDX is very competitive its common to make 50 to 75k on a 400 to 500k fix and flip..not much more if the home was open to competition was multiple buyers. ON the low end court house steps the high volume buyers make 10 to 20k maybe 25k on 250k and under. There is another member on this Site Stu fox and between him and I back in the early 2000 we were the number one volume guys in our market.. And its what led me to into starting my HML company in Oregon we made better money lending to the flippers than being the flipper.. with a heck of a lot less work.. But our risk went up as well since we were not in control of the asset.
I suspect you hit the nail on the head when you said in this instance something has to be wrong with the numbers.. If its a competitive fix and flip market were this property is and you can truly sell for ARV then your absolutely correct that this person should be able to flip that house and make 25k or more easy.
- 12yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Bring your armor with you to Detroit :)
- Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes12y
Originally posted by @Jay Hinrichs:
@Account Closed
dead on target K regarding west coast ... our market here in PDX is very competitive its common to make 50 to 75k on a 400 to 500k fix and flip..not much more if the home was open to competition was multiple buyers. ON the low end court house steps the high volume buyers make 10 to 20k maybe 25k on 250k and under. There is another member on this Site Stu fox and between him and I back in the early 2000 we were the number one volume guys in our market.. And its what led me to into starting my HML company in Oregon we made better money lending to the flippers than being the flipper.. with a heck of a lot less work.. But our risk went up as well since we were not in control of the asset.
I suspect you hit the nail on the head when you said in this instance something has to be wrong with the numbers.. If its a competitive fix and flip market were this property is and you can truly sell for ARV then your absolutely correct that this person should be able to flip that house and make 25k or more easy.
I want the OP to know my posts aren't about trashing his rehab deal. It's a wake-up call to the numbers and/or possible issues with this particular property. If it was offered on the open market, then why didn't it sell for more than $58K? If the buyer bought it off market, and the numbers are accurate then he negotiated a great deal. And the property can be sold for very good profit today. Possibly for as much profit as he might make having to use a GC and HML funds on both the purchase and rehab.
- Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes12y
Chris,
There are lots of different "types" of contractors, and some are going to be more amenable to forgoing upfront payments than others.
In my experience, it's those contractors who are better at money management and business management who are more likely to extend credit on a project and wait for payment. Unfortunately, these are also the contractors who tend to be more skilled at running a business, have support staff, have systems and processes in place, do some marketing, etc. These things cost money, and therefore, these types of contractors often (though not always) tend to charge more. For example, as Jay said above, when dealing with new construction -- and therefore much more seasoned and serious contractors -- it's not uncommon to get Net 30 and even Net 90 terms.
While you may get lucky and find very inexpensive contractors (or a GC) who will allow you to pay in draws after work is completed, it's more likely that you'll find that you have to pay a premium for this. You need to decide where the priority lies -- keeping contracting costs to a minimum and figuring out another solution to the cash flow problem or spending a little more and alleviating some cash flow issues.
There's no right or wrong answer, but it's unlikely that you can get everything you want without giving at least a little on things that your contractors will want. As others have suggested, attend a local REIA meeting, network with other investors and see if they have any contractors who are accustomed to this type of arrangement who they might recommend.
- Real Estate Investor · Sebastian, FL · Member since 2014 · 812 posts · 432 votes12y
@J Scott Agreed, but another factor to consider is that those same contractors who can afford to extend credit have also resolved a lot of the other issues (involving both personal and business processes) that might cause delays unnecessarily. Not that it guarantees no delays, but they are less likely.
- Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes12y
Originally posted by @Walt Payne:
@J Scott Agreed, but another factor to consider is that those same contractors who can afford to extend credit have also resolved a lot of the other issues (involving both personal and business processes) that might cause delays unnecessarily. Not that it guarantees no delays, but they are less likely.
Absolutely agree. Personally, I find the sweet spot for contractors to be right in that area -- they've got things together enough that they don't need $100 to buy materials to get started on a job, but not so together that they have a front office and a fleet of trucks.
The problem is, those types of contractors tend to either move up or down, so they eventually become either the type that has no cash reserves or the type I can't afford... :-)
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