Should I Invest in this Flip Opportunity?

32 Replies

Hello BP Community!  

I'm still fairly new and have a deal that I am considering.  It is with a local flipper who is quite experienced.  The deal is to lend him $200K for the duration of the project with the expected duration being approximately 6 months.

My goal is to learn and make a profit while doing it.  This project will be with a very experienced rehabber to take care of any hiccups that we could find during the process.

I am offered full access to the project and property, so I can decide the amount of my involvement in the project. We will have all documents on a Google drive, as well as weekly pictures. That way I can have all of the access available for you to learn as much as possible during the project, while still making a very nice return on my money. 

Appreciate your thoughts.

By the way, the pictures of the deal that I posted above came from the flipper.  This is the deal he is offering.  Thanks for your feedback.

Is he asking your for $200,000 on a 2nd position? 

How did this flipper find you? On paper, the deal looks great, so why has he come to you for money? Where is the remaining $750k coming from? Why is he offering you 12% interest when he could get better terms from other lenders? If you know him personally or professionally it looks like a nice deal. Otherwise, it raises red flags for me if he is looking for money on this kind of deal.

If it’s a second mtg (entertainingly referred to as “gap” funding), hell no, pass!

Hi @Jason DiClemente .  Thank you very much for the feedback.  I met him at a local real estate meetup eariler this week.  I've seen him there several times before, but we never met until this week.  He's an active flipper in the bay area and buy-and-hold investor in Tennessee.  We don't know each other very well but have some mutual friends in common and they speak well of him.

We started talking at the meetup this week and I told him I had not done a deal yet, but have been learning for about the last 2 years and want to get in the game.  So he put this offer together for me to lend on his flip deal.

The $752,000 is a loan that he already obtained.  Perhaps a private money loan, not sure yet where he got the loan, but it has 2 points and interest rate of 9.25%.

One concern that I have is that if I lend him this money, he will have very little of his own money in the deal, so he won't have much to lose if the deal doesn't go well.

I'm not sure why he is offering me 12% interest if he can get cheaper money elsewhere.  Do you think I should ask him that question?

Hi @Wayne Brooks, thank you for your feedback.  In the 2nd page of the offer, he says "Security Instruments:  2nd position Deed of Trust, Promissory Note, Named as addtional insured."  So yes, it's a 2nd mortgage.  Other than him defaulting on the 1st mortgage payments, is there any other risk with being in a 2nd mortgage position?

Hi @Ryan Dossey , thank you for the question.  Yes, is there any risk on this besides having to keep the 1st mortgage payments current for the duration of the deal?

@Justin Madison this is a really risky proposition. If you consider it, make sure you do your own due diligence. Confirm the ARV is correct and look over the scope of work and make sure it is accurate. I would ask to see his previous flips and the financials on other deals he's done. What concerns me is that you say he is an experienced flipper, and from the numbers I looks like his first mortgage is a hard money loan, yet they were only willing to give him 80% LTC.
I'll also ask about you.... What are your investment goals? Do you want to be a lender? Your profile says you want to own rentals, so why not go for that? The cash you have could, if done correctly, give you a better return on your money. Utilizing a BRRRR type approach would give you better returns, and give you more control of your money. Just an additional thought on my end.

Did the flipper provide you with the comps he's using?  Based on what I'm seeing, I'd comp it out at about $1.06 M, perhaps even less based on its proximity to the freeway.  The lot is about a third of the size as two of the comps which sold at $1.155 and $1.21 M.  Also, $60K is quite low for a rehab of this size.  It is feasible if the work is almost purely cosmetic but doesn't leave a big gap for unforeseen issues.  An experienced flipper will likely be able to price work out relatively well so hopefully he's on it.

I certainly run on the conservative end of things but those numbers are far too slim for my liking.  If you can review past projects and see that his numbers are similar and have worked, perhaps it's worth it.

@Justin Madison @Jason DiClemente

12% from a private investor is going to be cheaper than 95% of hard money out there, including his 9.25% and 2 pts (which are good terms for a seasoned investor).  If he finishes in 6 months, the 9.25% and 2 pts is actually more than the 12%.  Lenders will also charge you application fees, underwriting fees, processing fees, document fees, etc.  They'll make you pay for appraisal, for prepaid insurance, prepaid interest.  I might be missing other costs.

Flipper seems to know what he's doing, and he's giving you the benefit of profit sharing, whichever is greater.  80% LTC loans are cheaper than 90% LTC (or higher loans), which also probably explains the rates he's getting.

Not saying that you should or shouldn't invest in this based on what I've said and the numbers.   Do check out his experience.  Maybe make him sign a personal guarantee if that makes you feel better about being in 2nd position.  And see what the as-is value is; you don't want to be underwater right out of the gate.

You can do a lot of things with $200,000 too.  You have to decide if it's worth it to invest into something else.  Hard to beat the passivity of being a private lender though.

Two concerns: What have you done to track his credit, liens, background and track record on flips?  His $752K sounds like hard money @ 9+% interest possibly using your cash as part of hard money agreement. He probably denies it.

What makes you believe the valuation is there?  I think kitchen, living room wooden ceiling, and popcorn ceiling, vinyl flooring can use more update. If the home has the correct address, why it took 44 days to get into a contract? Market too slow for this 1954 vintage with updated home? In South Bay it would take ~5 days with multiple cash offers. If it took 44 days to market by adding more cosmetic and raise the asking price 1.25M w/o increase the size of the home, how long it will take you to market in 2018?

All the data I have looked at suggests San Mateo, Santa Clara County real estate median price reached to a peak sometime back in 2016.  I know East Bay has lost more jobs than the rest of the SFBA.  I read Leslie Bandy comment above and can not agree any more about valuation and rehab cost.  

Except one client of mine who goes to the most desirable neighborhood who claims gains. All the rest flippers have stopped rehab homes. Risk is the primary concern.

Good luck,

Justin, I flip houses in the Bay Area and have done several in Walnut Creek. A couple things. If the numbers on this property were accurate (i.e. ARV and rehab costs) my agents in Walnut Creek would have shot this over my bow given it was on the MLS. They didn't. The ARV he suggests is aggressive for that area and the rehab costs seem low. What is his scope of work? That place would REALLY have to be pimped out to sell for $1.25m.

The $752k 1st and your $200k 2nd put him at 76% LTV on ARV (if realistic). That's a bit higher than I'd leverage when using a 1st and private $ 2nd to gap fund, but not excessive. His cost of money for the 1st is pretty standard. Looks like 85% of purchase. He could easily get 85-90% of purchase and 80%+ of rehab from a hard money lender with the same terms, but he must have no cash to fill the gap. Also evidenced by the fact he wants to pay interest on the back end rather than monthly.

Walnut Creek is not Silicon Valley or even the South Bay or Oakland. Things can sit on the market a while up there and buyers often bludgeon you to death over inspection reports during due diligence. 

Not saying this can't work out based on the numbers. But I think the numbers are optimistic. 

@Justin Madison

I believe given your experience you should not be lending in 2nd position.  As an example we recently had to get a second position gap for 3 months due to another house falling out of escrow.  The loan was 350k for 3 months.  The rate we gave was 20% annualized.  The reason we did this was 1.  The loan was very risky 2) that's the going rate experienced investors charge.  We paid her off after 3 months.  If anything goes wrong with this deal-and believe me things go wrong all the time, hard money will muscle you out in order to protect their investment.  

I would pass.  In the future work out the deal where you are both on title in first position.  I would look at how hml securitize their investments and copy the professionals.  If a hml won't lend in 2nd why should you?

@Justin Madison His current "as is" value can't be accurate. It was on the market for a full month and no one budged at 949K. He might be one of those flippers who do a bunch of deals but for much smaller profits. I certainly wouldn't feel comfortable having a second position on any deal. You have to consider what's the average DOM and whether or not his ARV looks reasonable. He should be showing you a breakdown of the Scope of Work. It looks pretty cosmetic but this home will probably require some high end finishes.

You can probably do a lot more with those 200K or at least find a much better deal as a lender. I would rather partner up with another investor who is offering you a first position on a house with a 250K ARV, and you taking at least 10-15 % down of the total project cost.

Here is the Scope of Work with the budget for the Rehab.  What are your thoughts?

In the description above it notes, opening of the kitchen to the dining. In the scope it doesn't include framing, drywall, etc... I have also noted there will almost always be some form of electrical and plumbing associated with a kitchen and bath remodel. Unless the house is currently 100% to code (dedicated breakers as needed for appliances) and the layout will not change at all. I assume some costs are buried in the blanket prices? Things like sink, disposal, faucet, connecting al of these items... There is no MEP work needed at all? It is possible these costs are within the numbers seen above, however these might be some questions I would be asking.

Hi @Jason DiClemente .  Thanks again for your feedback.  Good thoughts.  From the feedback I've received thus far, I'm not sure I'll be doing this deal, as it seems like more risk than I thought.  As for me, I've struggled with getting started.  I've been learning for the last 2 years and been wanting to jump into the action for the last year or so, but have failed to get started.  I have had difficulty picking a direction because I'm interested in so many facets or strategies of real estate investing, such as single family homes, multifamily, short-term-rentals, notes, lending, etc.  So I think I've had analysis paralysis.  I was explaining this to this flipper and afterward, he offered me this deal to lend to him on his deal...  Since I'm new, I thought it would be a good idea to fly under the wing of one more experienced to learn under.  But, of course, I want to be wise and have understanding of what I'm getting into before I invest.  Thus, this post.  I'm extremely grateful for all the wise feedback I've received thus far.  It's helped me really try to understand the risk of being in 2nd position, as well as discern whether this is the right way for me to get started.

Hi @Leslie Bandy , thank you very much for the question. He provided one comp of a house he recently flipped about 1 mile away. It sold in April 2017 for around $2.3 Million. The address was 1954 Magnolia. So I imagine he is basing most of his assumed ARV off of this sale. That would be a good question to ask for his comps. I agree that $60K seems a bit slim for a rehab budget, so I asked him to send me the rehab budget. I shared it last night on this post. However, since I'm new, I'm not sure how realistic the numbers are. And it doesn't look like there is any fudge room for unforeseen expenses, at least, not from what I can see.

Hi @Nghi Le , thank you very much for your feedback and sharing your expertise and knowledge about loans, that is very helpful!  That is a great suggestion for a personal guarantee.  Do you think the deal would be worth doing risk-wise if the personal guarantee were signed?  As for me, I am just wanting to get involved in real estate investment and learn through my experience, after sitting on the sidelines learning through books, podcasts, meetups, personal meetings, etc.  I don't know what would be the best way to get involved.  At this point, I don't have a lot of time as I work full-time and I'm very involved with my church and family, which is why I need to partner with or lend to someone with time and experience so I can learn.  I just want to try to be wise about it, that's why I posted this.  I'm so blessed by all the helpful feedback from you all.  Thank you!!

Hi @Sam Shueh , thank you for your good questions and feedback.  I haven't gotten that far yet, but if I do, how would I check background, liens, credit, flip track record, etc?  Do I just ask him for that information? 

I have more work to do on comps, but he flipped a house 1 mile away at 1954 Magnolia (www.1954magnolia.com) that was a bit larger and had another bedroom, that sold for $1.3M so that's why he believes he can get $1.25M on this house.   Good question about time to market on this home.  I've thought about that myself.  I really appreciate your insight and experience.  God bless you!

Hi @Jeff Pollack !  Great to see you on here.  I go to your meetup at Harry's Hofbrau regularly.  Thank you very much for sharing your insight on the Walnut Creek market.  I am aware that you have flipped some houses up there so I definiately value and wish to heed you words.  It seems like the deal is a no-go for me with the way it's currently structured.  Question I have is:  If you were in my shoes, would you seek to restructure it to make it happen and what changes would you make?  Thanks and God bless you Jeff!

Hi @Jeanette A. , I really appreciate you taking the time to share your experience and expertise.  That's very helpful!  Would you think the deal would be worth doing if the flipper wrote a personal guarantee?  What do you mean by "hard money will muscle you out in order to protect their investment?"  I'll take your advise and look at what hml do.  Appreciate the great advise!  God bless you Jeanette!

Hi @Daniel Moctezuma , thank you very much for your insights. I totally agree that the "as is" valuation is way overinflated. I agree that DOM is a very important factor to consider as that can significantly reduce profits or even kill the deal. I need to do a bit more digging and evaluation for comps to get a better idea of what a conservative and realistic ARV would be. I posted a scope of work with budget per line item below your post. What are your thoughts on that?

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