Hey BP!

I am in the middle of my first BRRRR deal, and I think I've found a very low risk cosmetic flip in a nice high end suburb. Very low average days on market, definitely a desirable area to live, A to A- area.

My question is this: would you do this flip? Is this enough margin to account for the risk of getting into a flip?

3 bed 2.5 bath 2000sf 2 story vinyl home, 20 years old.

Purchase price: $150k

Potential rehab: $25k (paint, flooring, power wash, granite countertops for kitchen and 2.5 baths, convert loft to 4th bedroom). I think I’m way high on this estimate.

HML fees: 2 points, $275 application fee

HML funding: 90% of purchase plus rehab, up to 75% of ARV, at 9%, interest only payments, 12 month max term

Estimated total HML cost: $10,000

Commissions: $12000

Holding costs: $3000

ARV: $215-225k

Total profit: $15-25k

Thats 7.5% to 12.5% of total capital deployed ($200k).

But it’s $15/40 =37% to 25/40=62.5% return on my cash invested.

Help me decide!

These are the flips I like to do, a quick remodel over a few months with few big issues and low stress, an easy $25k profit. I am working on one right now. I have never used a hm lender and don’t know if you have enough capital to do 2 projects at the same time, but if you do go for it.

@Sean McCluskey This looks like a good deal. Only thing I would worry about is I know this deal can't be in the Newport Beach area. That means that it could be pretty risky if you are doing this remotely. How much do you trust your GC, sales agent, other contacts in the area of the home. Also, you left out your docs / admin fees from the HML. Those tend to run $500 - $1500. The application fee is high but the interest is low. If you haven't closed a deal with this company before, I would say tread lightly. There are a lot of scams running around where HMLs will take application fees and then never close on a property. They keep your money and change company names about 6 months later and do the scam all over again. Most large HMLs don't take any fees until you are sitting at the closing table.

Good luck on the project! It looks like a good one.

@Craig Jeppesen

Hi Craig, thanks for the feedback!

One thing someone mentioned to me is that a flip with a $15-$25k target profit can lose all of that pretty quickly if one bad change order comes up that was unexpected. Have you ever had that happen?

@Ryan Blake

Hi Ryan, it looks like you have a pretty unique skill set, doing both flips and HML!

The $275 fee and the 2 points are the only fees this HML collects, and they place the loan with one of the investors on their marketplace.

I was a day away from closing, with their money already in escrow, before backing out of another deal that would have suddenly cost me a lot more money and not been a good BRRRR or flip. So I've seen them fund a deal already.

I’m accounting for 9 months of interest in my estimate here, to try to be conservative in my timing on the rehab plus sales process.

Have you had any success with deals that have a slim target profit like this, starting at $15k on the low end?

The $15k profit would be the result of the market won’t pay anything for the 4th bedroom conversion. There’s a comp across the street from 1.5 years ago that sold for $210k

....or the market sucks/ stay flat in the next few months, but if the numbers played out you should make money or break even and learn a lot! 

@Ryan Blake you’re also spot on that this isn’t a local flip. I’m investing out of state in Indianapolis, and I have a GC that I’ve met in person, who I believe is pretty professional.

It's a goal this year to try at least 1 flip with them, and if successful, to run up to 10 flips in the year as I try to raise the capital to fund a big BRRRR (or "almost BRRRR) portfolio of rentals.

@Jaron Walling yeah that’s exactly what I’m thinking. I would be glad to make $20k on my first flip, in a safe spot of town, and have that experience managing the process to boot.

I’m trying to get a feel for if my margin is just too slim, even with that in consideration. It sounds so far like others are doing flips like this as well, which is encouraging.

Have you done flips with this kind of profit margin in Indy? Or are you exclusively buy and hold?

@Sean McCluskey I work a lot with $20k profits. In D/FW, profits are right now around 10 - 15% of the ARV (subject to purchase and financing). I work primarily in the $200k price point because that is what is selling fast right now. Most of my projects are at $20k - $30k profit from the start and that doesn't include my marketing costs to pick up the home but does include financing, holding, closing and all other costs.

In looking at your last post, yes, the profit can be eaten up quickly but it is less likely to be more than $8k. Change orders come in but you shouldn't be missing something that costs more than $8k. I am guessing if that happens it is because there was no home inspection done by a licensed and bonded inspector. If you did pay the $350 to have them come out and check the property and something big like that was missed, you claim against the inspectors agent assuming it was something that should have been caught by a reasonable licensed inspector.

Personally, that doesn't work for my numbers but I am also in a totally different market. Working with private money lenders that fund 100% with upfront rehab money helps me much better than dealing with draw processes and fees etc. 

A few points- Your HM estimate seems low. 180 days interest at $157500 loan amount is $7100. $3150 in origination as well. Your draw fees (~$150 per) and doc prep etc will probably push it closer to $13-14,000.

You'll need to have: 

-$17,500 down payment

-$3150 origination 

-$800-2500 closing costs (you didn't specify)

-$1500 utilities 

-$10-15k upfront for your renovations (assuming it's a reimbursement deal) 

Personally, $35,000 is a lot to have out on a deal at any one time, but ultimately it's all about your tolerance of risk. Build a 20% contingency into your budget in case your furnace craps out or your contractor decides to get squirrely 

@Sean McCluskey I'm currently in a live-in-flip situation but haven't decided to sell or hold. The neighborhood has a few comps, but.... they haven't sold for months! One in particular is priced near my estimated ARV and it's not moving. The market is slow for the season but the question is will it pick up in the early summer??

I always over budget and would not have a $20 unexpected expense, maybe a couple grand. I also do a lot of the work myself and only invest locally.

@Sean McCluskey

If you would like a second opinion on value I'd be happy to look at the property. One of the biggest mistakes I hear is overestimated ARV. Also on that note if you'd like to see how the market is trending I can run a neighborhood report for you.

Originally posted by @Sean McCluskey :

@Jaron Walling yeah that’s exactly what I’m thinking. I would be glad to make $20k on my first flip, in a safe spot of town, and have that experience managing the process to boot.

I’m trying to get a feel for if my margin is just too slim, even with that in consideration. It sounds so far like others are doing flips like this as well, which is encouraging.

Have you done flips with this kind of profit margin in Indy? Or are you exclusively buy and hold?

The margin is slim because of your high cost of funds and the fact that your commissions paid are too high. Myself, I would do this deal cash, list for a low flat fee (paying 2.5% to the buyers agent), and make twice what you're making on the same deal.

@Sean McCluskey what is your projected profit? Make sure that there is enough for when things don't go according to plan (and they won't) that you have enough cushion. I just walked away from a deal because although the overall cash on cash was good, there wasn't enough room for unexpected costs or prices softening. Also, have you calculated what your break even hold time is? How long can you hold the property and still break even? What are your assumptions on holding time from start to finish?