Flipping first property... Couple questions!

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Flipping first property... Couple questions!

Ben Ballinger
Developer · Newport Beach, CA · Member since 2016 · 71 posts · 25 votes
I am partnering with a mentor on a home flip but his expertise is more on the contracting side than the financing side so I figured this would be a better place to ask. The home isn't on the Mls, it's not even technically for sale but my mentor knows the owner personally and has convinced them to sell us the property for a great price (about $55k below ARV). The home needs 25k renovations which will take 4 weeks, so we're looking at 30k to split for 4 weeks of work. 1. My wife is a realtor and we want to save on the realtor fees as much as possible. But, I also want the house to sell quickly and not sit on the market. So is it better to list via MLS for more eyes and payout the buyer fee/agency fee and keep her split to 0% or is there a way to even cut out buyer/agency commissions as well? Or should we just do FSBO and rely on word of mouth and other non MLS marketing? 2. Financing. Is conventional financing out of the question for a project that needs to move this quickly? I feel like by the time the loan closes we would have pushed back the process a whole month already. I don't have my own cash on hand for 100% of the purchase price. What other financing should I consider? This is happening in Palos Hills Chicago area btw (for keyword alerts)
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Thomas FranklinPro Member
Real Estate Investor · Miami, FL · Member since 2010 · 939 posts · 739 votes
10y
Ben Ballinger Regarding your first question: Many Investors that flip homes use the 70% Rule that says 0.7 x ARV - Repairs = Your Maximum Allowable Offer (MAO). What hurts Investors that use this formula is it does not account for Holding Costs, Backend Selling Costs, etc. I use the following formula to determine my Maximum Allowable Offer (MAO). This formula is the Profit Margin Formula that accounts, for 99.99%, of everything. ARV – Desired Profit – Closing Costs to Buy – Repairs – 10% of Repairs – Holdings Costs – Concessions – Realtor Fees – Closing Costs to Sell = Your Offer (MAO or Maximum Allowable Offer). ARV: After repaired value or what you think it will sell for once repaired. Profit: This should be taken off the top first. Most people run their numbers to determine what their profit should be. That is backwards, you should use your profit to determine what your offer should be. Closing Costs to Buy: What is it going to cost you to buy the property? If you are using hard money you need to budget for the points and fees as well as traditional third party closing fees. Repairs: The money it is going to take you to rehab the property plus an extra 10% of estimated repair costs to account for unexpected repairs. Holdings Costs: Here is where a lot of investors get tripped up. Start by determining an amount of time that you will hold the property, probably 4-6 months. Then add ALL costs related to holding the property (utility costs, insurance premiums, property taxes, loan payments, etc.). Concessions: Concessions are what you give back to the buyer at closing. It could be for closing costs, unfinished repairs or something else. I typically subtract 3%, of the ARV. Realtor Fees: What is the commission you are willing to pay your listing agent (unless you are the listing agent) and the buyer's agent. Utilize 6% of ARV. Closing Costs to Sell: Title fees and other closing costs. You can budget around 4% of the sale price to cover these. This is a conservative formula. If you come out ahead without Buyer Concessions, on budget, etc., this puts more money in your pocket, when you close at selling. To answer your second question, there are alternative funding options. There is Hard Money, loans from Family Members, Private Money where people have a 401k that may want to earn a better return, etc. Funding payments you will factor into your Holding Costs. In conclusion, it is all about the numbers. What may seem like a nice profit, on the surface, may turn into a loss or a break even situation, if you do not account for all expenses.
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  • JD MartinBusiness Member
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    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    10y

    1. I would list it and let your wife be the listing agent. If you manage to sell it in house you're at 3%.

    2. HELOC, personal loan, HML. Depends on how confident you are in making a lot of money quickly.

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  • Jeff CopelandBusiness Member
    Real Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes
    10y

    Price is a function of supply and demand. More buyers = more demand. So generally, homes listed on the MLS sell for more than FSBO (about 20-25% more, on average, depending on the year) arguably because they are seen my more (and better qualified) buyers. Granted, sellers also have to pay commission out of that higher sale price, but the 20%+ net gain more than covers it. 

    In your case, you have the option of listing with your wife for whatever her minimum broker split is, but you will still need to offer compensation to a cooperating broker (buyer's agent) in order to list in on the MLS. This is typically 2.5 to 3% of the sale price.

    Conventional financing requires the home to be in pretty good, livable condition - in particular the roof, plumbing, electrical, and HVAC generally need to be free of defects in order for the property to be insurable, and insurance is obviously a condition of financing. My point being - many properties in need of rehab are not even candidates for financing in the first place.

    Conventional financing also generally takes 30-45 days to close. Other funding options are much quicker, and thus much more attractive to sellers.

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  • Jeremy S.
    Flipper/Rehabber · Mechanicsburg, PA · Member since 2013 · 189 posts · 84 votes
    10y
    There are still several costs you're not considering here including transfer tax on both transactions, utility cost during rehab, seller concessions, loan origination and interest. It still sounds like a possible deal but I would count on splitting 30k There isn't many ways around paying a buyer's agent their 3% unless of course, your wife was representing the buyer as well. And even if she was representing both sides, her broker will want their cut too. Even so, I'd still list it on mls with your wife. Cash and hard money is going to be your only options here unless the seller would be willing to finance during rehab. Or even bring the seller in as a 3rd partner and split everything above the already agreed price 3 ways. That would only require rehab cash
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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    10y

    $30k is going to get eaten up pretty quick.....5-6% closing costs on the sale(with a 3% discount) financing/holding costs, closing costs on the buy, etc....  Sounds your mentor is letting you do all the work, provide financing, etc. and he gets 50% of "SOMETHING" when you're done.  Sounds like a non deal, no one else wants.

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  • Charlie DiLisio
    Investor · Lake Worth, FL · Member since 2014 · 378 posts · 184 votes
    10y

    Another option is if you have the money to do the re-hab you can lease option the property, do the re-hab and do a double close when you get the buyer in place.   You would have to do your due diligence on the property to make sure there are no liens etc.  I would be careful dealing with someone that you do not know personally and the contractor would be paid up front as well!  He has nothing to lose and you are the one sticking his neck out.  Just a thought because I have seen many deals fall apart or the buyer gets caught holding the bag.  Good luck.

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  • Katie Neason
    Flipper/Rehabber · Bryan, TX · Member since 2014 · 258 posts · 170 votes
    10y

    like others have said, make sure you have included all your costs so at least you know what you are making going in. 

    I would list it in MLS all day long. It is worth the 3% to sell it. Factor that cost into the deal.

    As far as financing, it depends on the sellers timeline. Generally, flipping deals are from motivated sellers and what you are offering in exchange for a  well below market price is an all cash fast close but every deal is different. 

    As far as the previous comment of a 50/50 split being a bad deal. That is pretty common in my area. One party provides the money the other party provides the deal and manages the project and then it is split 50/50. 

    Is your mentor a contractor or a flipper? I would be careful with a mentor that is a contractor. Being a contractor and being a flipper are two very different things. If you were looking to be a contractor, then I would call a contractor a mentor. If you are looking to be a flipper then I would seek a flipper as the mentor. I would think a flipper would be very familiar with the financing side. A contractor not so much. What is your relationship with the mentor? Is this your first deal together? Check references. 

    Good luck!

    4Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    10y

    @Charlie DiLisio Rehabbing a property you don't have title to can be risky.....the current owners can get all kinds of liens attached to the property before you close.

    1Reply
  • Thomas FranklinPro Member
    Real Estate Investor · Miami, FL · Member since 2010 · 939 posts · 739 votes
    10y
    Ben Ballinger Regarding your first question: Many Investors that flip homes use the 70% Rule that says 0.7 x ARV - Repairs = Your Maximum Allowable Offer (MAO). What hurts Investors that use this formula is it does not account for Holding Costs, Backend Selling Costs, etc. I use the following formula to determine my Maximum Allowable Offer (MAO). This formula is the Profit Margin Formula that accounts, for 99.99%, of everything. ARV – Desired Profit – Closing Costs to Buy – Repairs – 10% of Repairs – Holdings Costs – Concessions – Realtor Fees – Closing Costs to Sell = Your Offer (MAO or Maximum Allowable Offer). ARV: After repaired value or what you think it will sell for once repaired. Profit: This should be taken off the top first. Most people run their numbers to determine what their profit should be. That is backwards, you should use your profit to determine what your offer should be. Closing Costs to Buy: What is it going to cost you to buy the property? If you are using hard money you need to budget for the points and fees as well as traditional third party closing fees. Repairs: The money it is going to take you to rehab the property plus an extra 10% of estimated repair costs to account for unexpected repairs. Holdings Costs: Here is where a lot of investors get tripped up. Start by determining an amount of time that you will hold the property, probably 4-6 months. Then add ALL costs related to holding the property (utility costs, insurance premiums, property taxes, loan payments, etc.). Concessions: Concessions are what you give back to the buyer at closing. It could be for closing costs, unfinished repairs or something else. I typically subtract 3%, of the ARV. Realtor Fees: What is the commission you are willing to pay your listing agent (unless you are the listing agent) and the buyer's agent. Utilize 6% of ARV. Closing Costs to Sell: Title fees and other closing costs. You can budget around 4% of the sale price to cover these. This is a conservative formula. If you come out ahead without Buyer Concessions, on budget, etc., this puts more money in your pocket, when you close at selling. To answer your second question, there are alternative funding options. There is Hard Money, loans from Family Members, Private Money where people have a 401k that may want to earn a better return, etc. Funding payments you will factor into your Holding Costs. In conclusion, it is all about the numbers. What may seem like a nice profit, on the surface, may turn into a loss or a break even situation, if you do not account for all expenses.
    7Reply
  • Ben Ballinger
    OP
    Developer · Newport Beach, CA · Member since 2016 · 71 posts · 25 votes
    10y

    @Wayne Brooks after clarifying with my mentor, he is doing all the construction work himself and I am only paying the material costs, so he is providing the sweat equity and I am providing the financial equity. He also found the deal, so I have to consider that. He's not pushing me to do this, and I trust him, it's just an opportunity he presented. Nobody else wants the deal because nobody else is aware of the deal, as the property isn't even on the market, she is a personal friend of his who got the property (from a dead parent) unloaded on her from a sibling last month and doesn't want to deal with it.

    @Katie Neason @Jeremy S. I apologize for a simplistic original post, I actually have considered these costs and used the home flipping calculator before I decided this was a good deal. I am imagining my cut after expenses, capital gains, closing, etc to be around 9750-10k, not 15k, but I forgot to mention that in my post. I ran the calculator assuming an extra 2 weeks before closing as well, which I feel is quite conservative based on the days on market for well-priced properties in this area, plus the fact that we have a network of realtors we can let know about the property at least a week ahead of time so they can have buyers lined up to look at it.

    @Jeff Copeland great points, the good news is the property is in fine condition, simply un-updated and ugly. No actual issues, we just need to re-finish or maybe just polish the hard wood floors, re-shingle the roof, paint the walls, re-landscape and do a kitchen/bathroom reno. That's why he recommended the property in the first place, because it's pretty much an easy fix up. No mold, structural damage, water damage, etc.

    Total rehab will actually be around 50% of the 25k, because he will be doing the labor himself, so our total investment is looking closer to $182.5k, 4 week rehab. Resale at least 220, I see that as being very competitive, perhaps even on the lower end of what I should be selling for.

    I decided to go with conventional loan and let the seller have some earnest money to cover the mortgage for this month till closing, and then fund the materials out of pocket since I have the funds for that.

    Any glaring issues so far?

    1Reply
  • Ben Ballinger
    OP
    Developer · Newport Beach, CA · Member since 2016 · 71 posts · 25 votes
    10y

    And my mentor is only one of my mentors, he's not my sole source of learning, but he just happens to be someone good with the contracting side since he's a contractor. He has a flipping business as well, but his partner does the equity side and he does the work, hence his lack of financial expertise.

    The good news is that I have the funds to cover this (more than enough, I own my own business and have a good cushion of capital in the bank) and mostly I want to get a deal under my belt to learn from. I see this is lower risk than going at it by myself.

    I am fully ok with making 0 dollars on this deal if I learn a lot from it and it helps build my confidence, so I have pretty low expectations that need to be met here.

    1Reply
  • Charlie DiLisio
    Investor · Lake Worth, FL · Member since 2014 · 378 posts · 184 votes
    10y

    Sounds to me that you have your answer. You are with an experienced flipper and you know the players. I think its a good starter for you and wish you the best on it. HML would work for you also if your turn around time is only a month until listing but the points and junk fees can be a bit pricey but either way you make money and its a great learning experience. All the best.

    1Reply
  • Randall Burris
    Denver, CO · Member since 2016 · 19 posts · 7 votes
    10y
    Ben Ballinger Google Peer to Peer lending.
    2Reply
  • Ben Ballinger
    OP
    Developer · Newport Beach, CA · Member since 2016 · 71 posts · 25 votes
    10y

    @Thomas Franklin after running the numbers with worst (realistic) case scenarios, I am still coming out with an annualized ROI of 200%

    0Reply
  • Ben Ballinger
    OP
    Developer · Newport Beach, CA · Member since 2016 · 71 posts · 25 votes
    10y

    Thanks a ton everyone for the help, I appreciate it!

    0Reply
  • Jacob Anderson
    Rental Property Investor · Cedar City, UT · Member since 2016 · 209 posts · 45 votes
    10y

    @Katie Neason makes a good point that you should learn from the right source. Just because I'm a contractor doesn't mean squat that I know anything about teaching someone to be a flipper.

    0Reply
  • Ben Ballinger
    OP
    Developer · Newport Beach, CA · Member since 2016 · 71 posts · 25 votes
    10y

    I understand, like I said he is a flipper, just doesn't do the finance side.

    0Reply
  • Account Closed
    Real Estate Agent · Richardson, TX · Member since 2014 · 511 posts · 161 votes
    10y

    @Ben Ballinger It's very unlikely that you can get conventional financing if you wanna flip it.  You can consider portfolio lenders or hard money. I know 55K sounds like a huge spread but make sure you are taking into account closing credits to seller and all the necessary holding costs. I'm not familiar with Palos Hills but make sure you are very aware of the village codes. Some villages have some ridiculous requirements which not only will impact your project timeline but the rehab can be more expensive than anticipated.  

    0Reply
  • Account Closed
    Real Estate Investor · Waxhaw, NC · Member since 2016 · 15 posts · 7 votes
    10y

    I see a couple of red flags from where I sit .  There are two quick sticking points that you want to be very certain on and discuss with your "mentor" prior to moving any further forward. 

    With your mentor's expertise on the contracting side I would assume he could be a contractor.  Is he going to pay himself or charge your partnership for the work done on the property during the rehab?  If so, that could drastically change the financing and the profit that you both see at time of sale.  Let's say he charges your partnership 25K for work done, depending on his business he could already be up 6-10K on the deal.  That is assuming his charges are fair market value. 

    Also be upfront on the listing plan and your wife's fees.  The same could be said here for your part, as the listing agent your family could be pulling 3% out right off the top. 

    All that said, I would list on the MLS through your wife and take a reduced fee as agreed upon up front, if he is more comfortable with a different agent with higher fees to keep business separate I would understand. But the same thing goes for his contracting company, get competing quotes.

    Travis

    2Reply
  • Ben Ballinger
    OP
    Developer · Newport Beach, CA · Member since 2016 · 71 posts · 25 votes
    10y

    @Account Closed he will be doing the work free of charge, only costs will be materials themselves and any labor we decide to outsource. He said if he does all the labor himself it will cut costs to about 50% of the 25k, so I said, then I want you to do it and he said ok. I am going to help anyway just because I want to continue to get first-hand knowledge of this type of stuff. I fully understand it is giving him a better deal but that's fine.  I am looking at this first flip as an education experience... getting paid any amount of money for education is frosting on the cake to me.

    I will front the money for the materials, then get back my initial investment before any profit sharing between myself and my partner.

    He's tapped out of equity at the moment as he has two other projects he's working on, hence his inability to provide capital.

    We've already been 100% transparent with one another about this and exactly how we want to do it, so I think we're in a good place. My wife is not planning to take any fee whatsoever, that money is going back to us for the deal, the only realtor costs would be for her agency if we list with MLS which is required even if she doesn't take a cut, as well as the buyer agent fees.

    0Reply
  • Ben Ballinger
    OP
    Developer · Newport Beach, CA · Member since 2016 · 71 posts · 25 votes
    10y

    @Account Closed what makes you say conventional mortgage won't fly? I already spoke to my mortgage loan officer and told him the details and he seemed to think it would be fine. Also I plan to ask the buyer to pay closing costs, but I've factored in 2k just in case I need to provide some credits. Since we will be listing below market I don't plan to cover closing costs on top of a sweet deal for the buyer. Plus in Palos it seems to be standard practice (my wife and I are home searching for ourselves as well at the moment and have yet to come across a seller willing to cover closing costs–in part or full).

    0Reply
  • Account Closed
    Real Estate Agent · Richardson, TX · Member since 2014 · 511 posts · 161 votes
    10y

    @Ben Ballinger Which bank you spoke to? I might be wrong, but I've never heard anyone flipping houses with conventional lending. Big banks like Chase, BofA, WF etc, don't lend money to flippers. They lend a max of 80 % LTV but they tend to be buy and hold properties. A local bank (portfolio lender) might consider the project if you have a good spread or you give a decent size down payment.

    The only method I know for flipping a house using conventional financing is through FHA using a 203K loan. But this only applies to people who have the intention of living in the property for at least a year.

    0Reply
  • Joshua Springer
    Residential Real Estate Agent · Columbus, OH · Member since 2013 · 281 posts · 110 votes
    10y

    A few quick points, you never want to give the seller ernest money directly.  It should go to one of the brokers (here its the buyers side).  You'll either get it back at closing, will go toward closing, seller will get it because you failed to close without reason or you'll get it back because seller couldn't hold up on their end of the deal...or in one of my cases financing fell through and seller wouldn't sign off on releasing the ernest money so I had to wait 2 years to get it back...yay Ohio!

    As others have said, you need to make sure the home is liveable in its current condition. If an appraiser tells the bank they notice glaring issues with major components and it's not liveable the home will not pass conventional requirements. There's a reason you see so many flippers looking for HML!

    Also don't get your wife's broker will want a piece of the pie for listing on MLS even if she doesn't take a commission. Find out if it would be the full amount regardless of commission or if they have a discount for selling personal properties.

    Good luck!

    0Reply
  • Ben Ballinger
    OP
    Developer · Newport Beach, CA · Member since 2016 · 71 posts · 25 votes
    10y
    Daniel Moctezuma you're mistaken, you must be thinking of something else. They don't lend out 80% loan to value on the mortgage loan. You were talking about a rehab loan, I am paying for the rehab with the cash, the loan is for the house.
    0Reply
  • Oscar SetiawanPro Member
    Investor · Chicago, IL · Member since 2016 · 11 posts · 4 votes
    10y

    @Ben Ballinger just read this post. I'm very interested in hearing about the update on your 1st flip! Hope you have time to post updates and photos! Thanks!

    0Reply
  • Ben Ballinger
    OP
    Developer · Newport Beach, CA · Member since 2016 · 71 posts · 25 votes
    10y

    Thanks @Oscar Setiawan, still in the process of it, actually had my contractor walk off the job ... sigh!

    But I am learning a ton in the process. I actually have another project going on simultaneously and both should be finished around the same time, so I will definitely post case-studies once they're completed.

    Thanks for checking in man!

    0Reply
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