In my First flip and need some help

12 Replies

I Purchased a foreclosed duplex in central falls, RI For $60k. ARV on the low end is $135k. We Used a HML and With $5000 down he is ballooning all the fees and payments till we sell the property. Rehab costs are around $30k which I don't have.
What do I do from here? Other than tapping into my inner network (family/friends/co-workers) how can i find private investors? What terms do i offer them? Do they go on the deed? What type of contracts do we use ?

I assume the HML has first lien position on the property. Which means a couple things:

1.  You have no cash of your own in the deal (i.e., no skin in the game);

2.  Any additional lenders will have to take a subordinate lien position.

That's not a very good position to be negotiating for more money.  Which means you're either going to have to find someone who WANTS to help you (friends/family) or offer someone a very good deal for helping you (equity partner, most likely).

Do you have friends and family who can help?

If not, are you willing to give up 50% of your equity for the $30K in rehab money?  That's likely what you'd need to do in this situation given the numbers on the deal...

@J Scott gives you a good but may be hard to swallow choice, but you could also do a lot of the work yourself.  Additionally, do you have anything you could sell? Any equity in your home? 

Keep in mind that depending on how you got the estimate of $30k for renovations, this could easily balloon to $50k. This happened to me on a recent rehab. It started at a $30k budget and quickly escalated due to a new furnace, new electrical service, and a bunch of other big unknown expenses. It's good that I had a pretty deep cash reserve to cover the additional costs. Had I not had reserves, I would not have been able to finish the job. Especially on your very first deal, you are going to screw some things up and that usually equates to lost money. 

Why dont you offer the HML an equity stake (i.e. probably in the 60-70% range) and have him finance the reno costs? If you're going to be forced to give up equity to get financing (which you will because no one will lend on a second lien) then you might as well partner with the guy that believed in you in the first place.

If you keep your reno costs at $30k, assume 8% selling costs and sell at $135k, you'll be looking at a profit of about $35k, which on a 40/60 (you/HML) split is $14k/$21k.

When you look at COCR, you're at $14k/$5k = 280% (not accounting for cost of loan, you'll need to add them here to get your true COCR) and the investor is looking at $21k/$30k = 70% (I'm not factoring in the loan here because that has a different set of financials, but he would need to add the fees and the $60k to get his true COCR.)

Thanks for the feedback guys.

Cal C. I purchased my home in December with with an FHA loan. I doubt I have any equity.

@Bill Coleman both contractors came in around 26k so i figure 30 is enough just in case.

J Scott I did put $5000 down and can you tell me more on a subordinate lien position?
How does that work? I do have some family willing to help but they are not able to cover the whole rehab cost.

Don't be so sure the contractors know their costing. I had electricians, inspectors and plumbers check out my unit before construction and none of them thought that the electric or furnace needed replacement. Fast forward to after closing and all of the sudden I needed all these things that were not anticipated. Another BP member just plugged his buddy's site www.123flip.com where he has details of probably 100 flips. I would get on there and read a bunch to get an idea of what pitfalls might lay ahead. 

If you really get "stuck" you could always try selling it wholesale. Wouldn't be a bad deal for an investor and you could make a few thousand. What was your initial plan to fund the rehab? Most HML will fund rehab as well. I would suggest shopping for a different HML in the future.

Medium head icon colorRyan Dossey, Call Porter | http://Callporter.com

I plan on finding private investors to fund the rehab. There is a decent amount of meat on the bone in this deal even if worst case senerio it goes over budget. Lets say I find 3-4 investors that want to invest 10k each. Whats next?

Originally posted by @Juan Arango :

I plan on finding private investors to fund the rehab. There is a decent amount of meat on the bone in this deal even if worst case senerio it goes over budget. Lets say I find 3-4 investors that want to invest 10k each. Whats next?

If they're going to be passive investors (no involvement or decision making in the project), then you've crossed over into SEC regulated territory, and you should be talking with a good attorney versed in that topic.  You'd likely spend $10K+ on legal and accounting fees to set up something like this legally...

Juan,

To assume you would find additional money partners AFTER you already closed on a rehab project without enough capital is extremely risky. Anyone who gets involved as a lender moving forward is in a 2nd position to your 1st position HML. If you get your family to give you money and you fail, the HML will foreclose to get the property and your families money along with yours will be gone. At the quick pace that interest accrues on hard money loans, you should have crews working on this project on day 1. I would definitely approach the HML again to ask for the additional funds before risking your families money. At least if you fail, you will only lose the property, not your relationship with your loved ones.

Good Luck

Derek Dombeck

715‑574‑4666

Maybe go back and speak with the closing attorney, they usually have contacts in the business who might help with this. Me, I'd run a mile from someone who goes into a deal with no exit plan or even seek some advice beforehand - regardless of how good the deal is. You're too ballsy for me, lol.

You need to roll up your sleeves and get to work. If the deal is as good as you say it is there is someone who out there who will take a second or partner up with you. Whatever you decide, make sure you get advice before you jump into anything else and you have come to the right place for that.

This is pretty much what I did starting out, jump in feet first. Best of luck with it!

If there is meat in this deal and you do not have the funds to complete the rehab, you should wholesale flip this property. Depending on the numbers, you could make a quick $10K or $15k, recoup your $5k, build credibility with your HML and move on to another deal. Don't get stuck on this deal because it is your first one. There are many more out there.