Purchasing a house to flip before securing financing for renovations!

10 Replies

Hello BP!


I was wondering for some advice - my husband and I are about to embark on our first house flip (exciting!!), we have analyzed the numbers etc and we are ready to try to secure our first house. 

We have not yet secured a lender for the rehabbing costs, can anyone shed some light on their experiences and what route they went? 

We don't have very good credit so we cannot go the bank route for a loan, we are looking for hard money lenders but we just have not yet got approved, we have been saving to make this dream a reality so to speak and are just a little concerned with investing all of our savings in a shell without knowing we will begin work straight away. 

Should we purchase the shell knowing the numbers work (??) and then just stay focused on finding an investor, or is it smarter to wait until all our ducks are in a row so to speak. 

We have been doing a lot of research and learning etc.we are just ready to get moving and grooving! 

Any advice welcome!! :)

This post has been removed.

If I understand you right  you do have the money to buy the house outright but not the money to do the rehab? Am I right?

My questions would be;

. How sure are you of your figures? 

. What process did you use to come up with the rehab costs?

. How did you come up with the ARV?

. Are you sure you will have enough for the escrow fees, etc. 

. If you chose to keep it, hold it, can you sustain the holding costs?

. How about property taxes? Can you handle those for a year at least?

. How safe of a neighborhood is the house in?

. What is the likely hood the house will be vandalized or damaged without anyone being there?

. It there a possibility the house can be set on fire in your absence?

How much work did it take you to find this house and identify it as a good deal?

. How confident are you that if you wholesale it to another investor you will find more good deals similar to this one?

. How much is the potential gain on this house between acquisition, holding, and all related costs in relation to the net ARV?

. If you did ever do the rehab and sold it are you accounting for real estate agent commissions?

. Over all would this house serve you better as a buy and hold, rent it, refinance it , then repeat in the future?

I see  you live in Philly. What is the attitude of your local building department on owners who have houses they are not actively repairing. I own a house in Penn state and was threatened with a lien on my house if I did not show signs of making immediate improvement but that is in Pittsburgh so I am asking about Philly. I was threatened with a $6,000.00 fine so of course I got the work started right away all be it before I was truly ready to deal with that expense.

If you chose not to wholesale it but keep it can you pay for it to be boarded up and made safe including keeping the landscaping and surrounding areas clean and likewise safe?

Do you live close enough to drive by or visit the house frequently to make sure of its continued condition?

Would it make sense for you to seek a joint venture with another investor or a contractor?

Is there any possibility of you living in the house as is while you make repairs? I am assuming not but I am still asking?

You say you cannot afford the rehab costs or a loan but do you have any money you can use to at least get started with the repairs?

Do you have  enough for all the needed materials but simply lack the money to pay for the labor needed to effect the repairs in total?

Try answering the above questions and then I can see if I can imagine a manner for you to proceed. No guarantees mind you I am simply thinking of what might be possible for you.

@Gilbert Dominguez

Hi Gilbert! Thank you so much for your input - 

The house we are looking to purchase is a complete gut we have the money to purchase the home (it is looking good we are going to get it for 15K, it has been vacant for a year and there is some water damage/mold in the interior. The rehab, after meeting with the contractor is in a ball park of 80k. 

According to comps and our realtor after a full gut the house will be put on the market starting at 150K. We live close by so we would be able to keep an eye on it and property taxes are only about $1800. The house is not at all live-able, between the mold and just the overall poor conditions of the interior and the roof needs to be replaced, so I think right now we are moving towards not buying it, rather than buy it and sit on it. Also money wise, we are looking to make a return, we don't want to invest our money in a house that is just going to sit for months if we cannot rehab it, financially we are just not in a position to do that right now.  

It is in a great neighborhood - we live here and part of the reason we are finally getting into real estate is because we love our neighborhood so much, I used to be a college basketball coach and for me to accept a new position meant relocating and we did not want to leave Mt. Airy. Mt Airy is about 15 minutes outside Philadelphia, it is diverse, affordable and the realty is gentrification is occurring and we feel it is a great time to start our business. There is a huge amount of construction and improvements occurring in housing and in commercial buildings . We recently went to a local REI meeting and a long time development thinks in the next ten years Mt Airy houses will be hard to come by in regards to the affordability it currently offers.

We wouldn't really be interested in buying the house and holding it - we have a goal to start August 1, we were just a little nervous about purchasing the house, starting the renovations and then not securing the financing to finish the deal.  We have worked hard to get our little cushion to get started so we don't want to squander it. 

We have touched base with a few hard money lenders, but they are concerned about our experience since it is our first venture. We will keep plugging away at it, because the numbers do work and we know we will eventually find someone who is willing to fund us, I suppose we are just being overly cautious because it is our first gig and we are investing our own money. 

But the math works - so if we can just get some good news back from a lender that would make us feel alot better about moving forward! 

  

The only thing I might suggest then is to try and find a builder, maybe one of those working on the projects you see around and ask them if they would consider doing a joint venture with you without first giving away your secret of course. I mean you will probably pass it up but if?

Also let me know later on how things develop with you there as far as your business. I own one house in Pittsburgh I might want to do something with someone from Biggerpockets if they might be interested at a later date. The house also needs allot of work but I do own it outright. Anyway I do think there are plenty of deals out in your area and I feel sure something will come available for when you are financially ready.

@Laura Pruitt  You need to be really sure of your numbers, they're tight, tighter than I would like to see if you're using hard money, have no experience with remodeling, etc. I'm a big fan of jumping in and figuring things out, much like you're doing, but it can be painful and costly at times. 

There are so many things that can go wrong here, tread carefully! Your contractors estimate better be spot on and all-inclusive. If you weren't clear on your finishes, he may be assuming a much lower level of quality than you were. Is he pulling the permits? Removing all waste, paying for dumpsters? 

If you want to PM me the block the house is on, any interior pics, scope of work, etc., I'll take a look for you. Even if you don't buy this one I may be able to at least help you determine how good a deal it was (or not!) and you can apply that knowledge to the next one. I'm certainly not an expert but I may spot something that could hurt you.

There is a timely AskBP Podcast about saving up for a downpayment, which could also work for saving up for repairs for future projects. Check it out.

Hi @Laura Pruitt

Let me piggyback on Troy's comments and echo caution whenever estimating your rehab costs.  What worries me most is the mold issue.  Is it black mold?  Have you had a mold remediation specialist take a look at this?  I rehabbed a house in the past that had black mold in the master bath and only in the master bath.  It was a small area in the shower stall.  The cost to bring in a remediation contractor, to test to determine type of mold and extent of growth, remove mold, treat area, and retest cost me about $8,000 dollars. If you have a significant amount of mold this could be a huge chuck out of that $80,000 estimate.

I live in Mt. Airy as well, and recently have been doing some normal maintenance/replaces on my home such as brick pointing, new wrought iron railings, new steps and patio.  I image the home you are looking at rehabbing is similar in size to mine and it a row home.  The cost to brick point just the front of my home was $1600.  The  new steps were $1600.  The cost for the wrought iron, simple no frills, $800. New garage door, $1500 and my new patio came in at $1200 (I got a discount because I was doing the steps at the same time).  I am sitting somewhere around $7000 and I haven't touched the brick pointing in the back of my house or the lawn.  Your $80,000 estimate seems a little tight to me as well.  Especially if you are planning to finish the basement which is pretty much a must in order to be competitive in the area these days. 

I just want to give some ideas of actual costs. 

Please feel to inbox me if you have any additional questions about service costs on homes in Mt. Airy.

I say find a better deal guys. Numbers that tight may seem like a passion project to hard lenders and more assumed being you guys have never done this before. Now days 65% ARV is becoming more and more standard , plus up front points even after your first deal. Let's say for instance the numbers where reversed 80,000 to lock down the house and 15,000 in repairs . You've got closing and escrow fee's and so on and so on. You still make the same money if all works out as planned. BUT! There is much less risk if the numbers were reversed. IT'S what I call a lopped sided deal and you can find much better deals with a lot less stress on you and much easier to get funding.

 I hope you guys find what your looking for just don't give up. It's out there for sure.

Thanks everyone!! 

I think we are going to keep looking for sure! 👍😊

I worked out your figures and I see a good chance for you to come out of it with a gross gain about between $2,000.00 and $3,000.00 . That is a good gain however its only about a 12% or better. Imagine how much work all this is going to be and the amount of time its all going to take. How much will you be worrying and sweating since its your only money and your first time out. Then imagine what could go wrong. You could not handle things if they should waver outside of your calculations. There are no reserves or room to move. 

However this does give you a good indication that if you are looking at a house that will sell for $150K your all in should be not $95,000.00 but closer to $70,000.00. I agree that you should be looking at something more the reverse. with your rehab cost being $15,000.00 or your own cash on hand is significantly more. 

Suppose you ran out of money and the project did not get finished and you still were on the hook for paying back a loan? What about the house not selling for $150K or not selling at all? You could easily get yourself into a deep dark hole.

Its not really that you have only $15,000.00 you may have more but even if you had all cash to do it a selling price of $150K is still tight, You will have closing costs and agent commissions front and back ends if you sell. Property tax, insurance, escrow fees. Sometimes people do not realize escrow fees can be thousands of dollars. What would you do if your seller's escrow fees totaled between $7,000.00 and $10,000.00

Remember that your all in is not equity. It is money out of pocket. Its all expense money that has to come back to you before you earn any gain and then you also have to pay income taxes on the gain even if long term gains you are still looking at 15% tax.

I think its a good thing you have not gotten any loan yet because if you could you probably would jump in and be headed for a possible train wreck your very first time out.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here