Partnering in a flip with multiple people in Bay Area

10 Replies

I would appreciate any insight or advice any experienced flipper can give me on this.

My mortgage broker friend called me today with a potential opportunity to get in on a flip. 

Property is in Berkeley Hills, two story with the bottom part of the house if not a permitted conversion.

It's currently a 2/1.5, Purchase price is $1M, est. rehab is $250-$300k, ARV is $1.6M. Part of the play is to legalize the bottom part of the house, adding one bed + 1 bath hence increasing sqf. He is raising enough money to buy the property for cash and rehab it.

I do not have the full details yet but wanted to get some insight how these deals are done as there will be multiple cash investors in it.

He wants $150k in the deal from me for 3 months for a 10% return. After the 3rd month, the plan is to refi the house with private money (?) and pay me back. I have never heard of doing this and not sure if this is something that can be done? The project would take 6-8 months to finish I'm thinking.

What struck me was that this could be purchased with PM for a 10-12% annual rate instead of paying someone 10% for 3 months? 

I do not have millions yet and $150k is a lot of cash so want to understand my exposure which seems great. I will get some more info tomorrow but wanted to see if anyone can point me how these deals are usually done?
Thanks!

@Jan Halasz This seems like a deal worth exploring.

The biggest question I have for your friend is how he get the project done with permit in 6 months. I deal with the City of Berkeley all the time, that estimate seems a little optimistic to me. If you do the project without a permit, is that ARV realistic?

Also make sure it is not in a slide zone. Good luck.

@Jan Halasz your friend is basically asking you for a personal loan for 3 months with a rate of 10% interest.  I am not sure if this is simple interest or not, but the important point is how he will secure the loan.  If he is just asking you to take his word on it, you should walk away.  However, if he is actually going to tie the loan to something and you can get the right documentation in place, then it might be an interesting discussion.  This is more of a business analysis issue then a real estate deal.  The relationship you have and the collateral on the loan have a ton to do with the decision.  I have done several of these with people that I got to know well on BP and they have all gone well.  With that being said, I am not a hard money lender nor am I professional in the lending community.  These are just my personal experiences with something you are considering so please do not take this as professional advice.

@Arlen Chou thanks for the feedback! You are absolutely right: I would not do this without a sizable collateral. I am just curious: what kind of collateral did you get when you did it? Were you in 1st lien position?

Just sounds fishy to me.  Not in CA and not familiar with the properties, returns, etc., but seems slim for such a large investment to me.  But as mentioned, it's just a personal loan for you and not really relevant to RE investing, but whether you get paid back could rely on the outcome with no upside.  I'd walk and find better use for your money.

Berekely is full of old houses sitting on great lots that would be very good flips. I see them all over the hills. However, every single project house that I have seen sold takes years and years to finish and sometimes goes through multiple owners before the project is even completed. Also Ive heard from experienced flippers that they stay away from berkeley because the permit process is so cumbersome and slow. As a resident it really pisses me off because Id rather have houses fixed up and sold which would increase the value for all the other homes around. The house next to ours is uninhabitable and is now on its third owner who is trying to fix it up. I see construction in fits and starts but its been months and hardly anything has happened. So in short, berkeley flips are difficult.

Due diligence will make or break this deal! If you want to go above board and can afford the timeline, start with the city, county & state codes. Everything is online for free so you can do the homework yourself while getting bids on the work so you can come up with an offer price.

@Jan Halasz most of the time it has been tied to a piece of real estate or other asset.  In some cases it was another property that was held free and clear in some cases it was tied to the purchase property.  In some other cases it was tied to shares in a company.  First position is really the best way to go, but sometimes I have taken a weaker position because of the particular situation.  In those cases, you really have to understand that you might not get your funds back... and you have to judge the +/- much more carefully.

Thanks @Arlen Chou for the explanation! I was thinking the same thing and questioned the collateral. One of the partners in the deal is a very experienced developer actually, which is a major plus. They wanted to go with a JV as -apparently- the tax implications are different vs. a loan. I haven't done enough DD to confirm this. Anyhow, decided not to partner as it's more risk than I am wanted to take, would have done it with a 1st lean position. Thanks a lot for the responses!

@Jan Halasz It has been my experience that anytime you have any rezoning or government agency to deal with, it does not move quickly or smoothly. 90 days seems very unrealistic as a timeline to be able to refinance the property if you have red tape to deal with.

I would also caution you that the more people involved in a deal, the more complicated the decision making process. I strongly suggest having a written agreement in place that clearly describes the decision making process in financial and non-financial matters, which investors take priority on payments/distributions/withdrawls, and if that same seniority applies to any losses that may occur.

I'm doing 3 joint ventures with single partners right now, and we have operating agreements in place that clearly delineate these things so we don't have any ambiguity. Good luck if you decide to move forward.

This laborious nature of the Berkeley permit process is really an issue.  I live in the Berkeley Hills but am looking for flips in Oakland. I would want to hear from your friend's contractor about scope of work and a timeline before putting any money into this.

Join the Largest Real Estate Investing Community

Basic membership is free, forever.