Going to institutional lenders such as banks and mortgage companies or private money lenders (hard money)
And what does it take to qualify for each with no previous experience
or any other option that you may recommend will be greatly appreciated
Just go to a mortgage broker. No experience necessary. Just 20% down, decent credit and steady income is all that you'll need.
Just go to a mortgage broker. No experience necessary. Just 20% down, decent credit and steady income is all that you'll need.
As far as I know, you will have a hard time getting a "conventional" mortgage for a flip project, a lot of listings for distressed properties being sold "as-is" that need work, often lots of work, which are prime candidates for being rehabbed and flipped, will say that they are "cash only" in the private remarks of the mls listing, basically telling realtors not to waste their time showing them to buyers looking to finance them with a "regular" mortgage. So, getting the financing for your first flip is different than buying a house to live in normally.
Banks will still lend people money for flipping a house though, but you have to put together an attractive plan for your business (because that's what it really is, a business like any other start-up) to sell to the bank. I get my financing through a "regular" bank, but it was all prefaced on the fact that I had done this before and (actually more importantly!) that my partner had a long term relationship with that bank, had financed other successful business ventures with them, etc. I'm really not sure what they would say to a first-time flipper, but I'm assuming that you're going to have to sell yourself and your business plan to them for them to loan you money for a flip project.
I've never had to use "hard money" but as a realtor, I have sold properties to buyers who have use hard money and every time I was blown away not just by the high interest rates, but also by all of the various fees the lenders would work in to their loans. Yet, I know that people have made money and gotten their start relying solely on hard money to finance their first projects.
Also, one more thing is of course that you will need to get the money for both the purchase of the property, as well as to finance the rehab project, too!
With a presumed great deal you bring something to the table that’s in high demand. But you’re a bit short on details Alex R. Perhaps you could post them here?
You said you have no experience. In my view, partnering with an experienced flipper, local to your area and who knows the ropes, is your best bet. If you choose the right one, they’ll know lenders and can add credibility you don’t yet possess. They’ll also know contractors and agents if you’ve never done that ether.
You’ll learn there’s a lot more to flipping than finding a property. Right now, with no experience, you might have a hard time finding money unless you put a huge amount down and/or are willing to accept onerous terms.
Here’s at least one real estate club in Bakersfield you might attend to find a partner.
Cash only doesn’t mean that you have a suitcase full of $100 bills or all the funds available in your checking account.
I believe if you have a preapproval letter from a financial institution or a commitment letter of funds from a private letter, that will suffice too.
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Sounds like a great idea on paper, but why would they want to team up with someone who has no experience?
In other words what are possible motivations for them and also how can I make it possible to get an experienced flipper work with me?
Cash only doesn’t mean that you have a suitcase full of $100 bills or all the funds available in your checking account.
I believe if you have a preapproval letter from a financial institution or a commitment letter of funds from a private letter, that will suffice too.
Pre-approval and commitment letters ARE NOT the same as CASH. You see, some third party still holds veto-power over your getting the funds at closing with those letters; with cash, you don't have that third party that can kill the deal.
Commitment letters used to work but no more (at least around here) because anyone could write one. Sellers generally want to see a proof of funds such as a bank statement.
I wrote, “With a presumed great deal you bring something to the table that's in high demand.”
I meant a great deal (I assume).
You might notice that many of the posts here are discussions about the lack of inventory. If you truly found a diamond in the rough, there are many flippers that would be interested in speaking with you. If nothing else, perhaps you could wholsesale the deal to them. I wouldn’t if I didn’t have to though, due to the opportunity for an education.
Depending upon the profit that could be derived, you might just let them complete the property with the understanding that you want to minimally participate but understand every aspect of the project. There might be little to no money in it for you but the education would be “priceless.”
Alternately, if you’re really skilled at finding properties, many flippers will want to team with you full-time as a partnership. You find the deals and they do the rehab. The most successful flippers I know, work in teams like this.
Jeff
These are some very good points Jeff.
I noticed that you work in LA area so I am sure you are familiar with Bakersfield market as well.
I don’t think the issue of “the lack of inventory” is so bad in here. My coworkers have been purchasing 3 or 4 bedroom houses with a really great price.
A house sold in 2006 for $270,000 was listed and sold for $100,000 last month.
Uh oh. Now you’ve got me worried, Alex.
The value of a house in 2006 is completely irrelevant today. Properties have dropped in value nationwide. This is not how you value a property.
How much have similar properties sold within the last 6 months or less, and within ½ mile of this one. That should give you a better idea.
You really might want to post the details here before you get in over your head.
Oh, my previous comment was not clear at all. I am not saying that a property sold today for the third price of what was sold 7 years ago is a great deal.
A great deal is a deal that makes you great profit “at the moment” regardless of what it was sold for in the past or what will be sold for in future.
Flip projects are independent of the house value appreciation, even though if that happens its considered a bonus.
By the way there is no specific property I have in mind yet. I am still in a learning process (I know the basics) but I am planning to do a flip this summer.
My regular work schedule is 8-5 and I want to make a better use of my hours after work; so this summer should be quite interesting for me.
By the way is there a quick test for what would be qualified as “a presumed great deal” Such as a certain percentage or criteria.
For example if you purchase a property for 70 % of its ARV, is it considered a great deal ?
I am more inclining towards %55 and that wouldn't be impossible to find in bakersfield
Right on the money John.
But other replies have made it look a lot more complicated than this :D
Your formula is incorrect. I believe you’re trying to use:
(Purchase price + Rehab Costs)/ARV < 70%
This is really just a rule of thumb and not terribly definitive because it doesn’t reflect your required profit.
Here’s a recent thread that might explain the pros and cons to you and an alternate approach.
Jeff
P.S. Also, to respond to your comment; I know nothing of Bakersfield Alex, but with an afternoon of research I bet I could find it on a map. I do know people who invest there.
I am lookin for people who have the money and invest here in bakersfield
Alex, besides finding a property, what do you bring to the table to rehab and flip? You migh consider a wholesale approach. Jeff gave you something to consider, very good advice.
No one can see your profile or even any experience that you might have, real estate or other experience.
I had to turn down hundreds of people who thought they wouldbuy a house, fix it up and sell it or live in it, getting sweat equity. As a lender, if you don't have the experience at construction knowledge, meeting code, etc..... how do I know that doors and windows will open and close, that nails won't pop out of sheetrock, that some electrician won't do a messy job and rip you off?
I'd say find a partner and work out what you can bring to the table and learn before you try to leap. :)
I had to turn down hundreds of people who thought they wouldbuy a house, fix it up and sell it or live in it, getting sweat equity. As a lender, if you don't have the experience at construction knowledge, meeting code, etc..... how do I know that doors and windows will open and close, that nails won't pop out of sheetrock, that some electrician won't do a messy job and rip you off?
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Bill Thank you for your reply.
No one can see my profile at the moment because there is nothing there. As soon as I start and finish my first project, I will update it.
Meanwhile even if I had the knowledge and experience, I was not going to do the doors and windows myself, First I don’t have the time (I am a full time engineer working 8-5 five days a week) second that’s not my role and plan for this intended flip. That’s the duty of contractors and GMs to do that.
What can I bring to the table, is connecting the dots, making things happen and running the whole show. This includes finding the right deal whether by myself or though an agent, Financing the entire flip (partly my own money, partly friends and relatives investment) , talking to the banks, private lenders and mortgage companies, Do the necessary analysis (an area that I am pretty good at) , making an offer,
Identifying and locating the right contractors, electricians, plumbers , …. By doing lots of research, networking, talking to them in person and also talking to their previous clients for a performance review; planning and assigning the construction work, swinging by the house every day to make sure progress in being made as scheduled and basically supervising the entire project from the very first step through the end.
This way investors will not worry about any “nails popping out of sheetrock” because the nails will not be done by me as every specific task of the work will be done by a professional with experience in that field and then from a bigger view the whole project is being supervised properly.
To better summarize it, what I bring to table is: My search skills, analysis, delegating tasks, bringing in funds, supervising and management
Right on the money John.
But other replies have made it look a lot more complicated than this :D
The point I and it looks like several other people here were trying to make regarding "cash only" listings or most any property that needs a lot of work (which are thus the properties that would be good candidates to flip) is that you CAN'T just go to a mortgage broker (or a bank, credit union, etc) show them your good credit score, good income, etc, hand them 20% down and get financed for a flip project, as if you're there getting a mortgage like anyone else making a "retail" house purchase! Not to say that banks will never loan money for flipping houses, but you have to approach it as if you are going in to get funds for any start-up business you want to start. They're going to evaluate your loan app like any other business loan, its far different than going to a mortgage broker or bank for a mortgage to buy a house. You're going to need funds one way or another to cover both the original purchase price AND to cover the entire rehab project, which will always be a substantial amount of money.
John's advice would be great for buying yourself a rental property, those are usually 20% down, etc but as far as I've ever heard, you're not going to get funds for a flip from a regular mortgage broker.
John's advice would be great for buying yourself a rental property, those are usually 20% down, etc but as far as I've ever heard, you're not going to get funds for a flip from a regular mortgage broker.
Is this because for rental properties, banks feel with ungoing rental income you will be able to make the monthly payments but with flip there is no such guarantees hence it would be a higher risk to finance it ?
Also if you plan to buy a house in good conditions and then rent it out, then it will be a rental property and % 20 down payment will be enough?
Many houses I have looked at can generate positive cash flow if rented.
Alex, you're all over the place, flipper, rehab, landlord, let's stick to one matter.
What kind of engineer are you? A civil engineer, structual, IT?
It would make a big difference if you have construction knowledge as an engineer, if not, like an IT type, you might as well be a baker talking about construction.
The point of my statement was not that you would hang the windows, but what experience do you have in contracting with GC and finish workers to hang windows, what assurances can you give that the collateral will be repaired in a good, workmanlike manner?
Actually, it's sounding better, if you find your GC and then go with them to the lender and have a contract for the GC to do the work, then we can cross that issue off the list of concerns.
If you do have good credit, money down and a contractor, that changes alot from where you began above. You need to give folks more info in order to advise.....
Now, looks like we need to study some more about valuations, ARV, market value, appraisal issues and your market. A good deal is a deal you make money off of, but there is more to it than that assumption, you could have a great deal in your eyes, but if you build in the wrong market you could hold it for a year, then it's not a great deal.
I won't mention a word about what you might earn as your tax liability might be brought up..... LOL :)
Bill Gulley,
I will bring up the tax liability part.
Depending upon your earnings you could raise your tax liability up significantly. Granted there are also options to shelter some of the funds with retirement accounts and multiple corporations. You also need to consider your accounting needs.
-Steven
What kind of engineer are you? A civil engineer, structual, IT?
It would make a big difference if you have construction knowledge as an engineer, if not, like an IT type, you might as well be a baker talking about construction.
I am a petroleum engineer and that’s why I live and work in Bakersfield (energy capital of the state of California)
I have some knowledge of structure and civil engineering too but I don’t think that will make any difference here.
If the rehab project needs substantial work I will not get involved in it. Examples are foundation work or restructuring the property, adding a bathroom, increasing the size of kitchen, building an addition,… These are considered high risk flips as costs for repair my substantially eat into profit or make it a loss unless you have done it before and know exactly what type of work you are getting into.
For my first work, I am more interested in doing a rehab with most common improvements such as paint, carpet, broken windows, leaky roof, counter tops, garage doors ,…. that will prove me with a good learning experience as well as a reasonable profit as a bonus :-)