How should I structure my offer to buy a failed flip

Question

I just found a house on the MLS which was actually listed by my agent so I learned some valuable info.

The flipper backed out halfway through the remodel because they discovered that an addition wasn't constructed correctly and needs to be removed.  Leaving the HML with the house.

If my numbers are correct,  this house would be a BP approved BRRRR leaving me with ~10K in profit when it's all done.

So what I'm thinking is offer to pick up where the flipper left off with the HML seller financing the house to me. It is listed for 150k the comps are 250k. Offer 10% downpayment, 8% interest only. Balloon payment in one year or less.

Does this sound stupid?  Is my interest rate off? Is there something else I should consider?

Joe Villeneuve · Answer

If I had this property in front of me, and someone wanted me to make an offer on it, I would make very sure I included one extremely important thing in my offer...invisible ink.

You're trying to rationalize a bad deal into a good one...and not very well.  You will be walking into an endless stream of cost overruns, and any thoughts of a $10k profit will be long gone before you're halfway through.  Just the $10k alone as your goal is way too low for any rehab job...much less one like this one.  Sorry, but make sure that ink pen doesn't leave any impressions either.

Keith Hague · Answer

@Odie Ayaga the point to thinking through all this is that if they ARE interested in seller financing,  I want to have an educated offer ready to go. I wouldn't want to find out they are willing, and then tell them to wait until I research what my offer should be.

Carl Millsap · Answer

@Keith Hague  Not sure of your experience level  so....I would get a 2nd and 3rd opinion on the house to ensure my assumptions are correct.

I found a similar house where the flipper has replaced windows, HVACs and hot water heaters, got into the wiring and stopped. They uncovered some foundation issues that made it impossible to recoup the cost of finishing.

Listing didn’t have any information about the foundation, my lead guy saw it as he was standing at the corner of the house and happened to look down the back wall and noticed it was bowing out.

Why start at 8%, start 1/2 to 1 point above market and see what the owner is willing to do. Worst case scenario you end up at 8 best case you save a few points. 8% is high in my market.

Interest only @ 5% for six months, 5% down would be my starting point. Just enough skin in the game that if you walk the owner is compensated. Plus every $ I have available for repairs is a plus especially since the potential risk has increased with a lower ARV if the extension has to be torn off.

Odie Ayaga · Answer

If they're an institutional lender they should have a website that lists their general terms for the terms they offer investors. Those should provide a guideline as to what to offer them. Hard money lenders don't typically have terms offered to them, they get the borrower's profile and present them with the terms that fit that profile so you could also call them pretending to be a borrower and tell them about you and see what terms they would normally give you as well.

Odie Ayaga · Answer

I wouldn't even bother doing anything else or wasting any other time without actually talking to the lender. What's the point of even thinking through all of this if they aren't interest in seller financing (which is likely if they're an institutional HML) and would rather someone purchase and buy them out? It's very possible no matter what terms you offer they wouldn't be interested.

Bryan Devitt · Answer

Is that $10k what you will pull out at the refi after the BRRRR is done? How much equity will there be when it is done? What do the rent numbers look like? I would also start low and see what they say. If you start at 10% down/8% IO they might ask for 15%/12%. If you start at 5%/5% they won't try to jump you to 15%/12% hopefully.

Victor S. · Answer

was it the flippers discovering the addition is built incorrectly or the city? i'd check with them (city, etc.) to make sure there are no other surprises. how did you arrive to your $20k estimate, btw? if the other rehabbers weren't total newbs, i'd triple check your assumptions. if they were, i'd triple check their existing work that was completed.

Keith Hague · Answer

That's absolutely right.  Thank you for your advice. I'm eager to see what I find tomorrow

Bryan Devitt · Answer

$200-400/month with $50k in equity is good if all goes as planned, even if you don't get any cash out at refi it is literally free money every month and equity in trade for sweat equity, I will take that ever day.

Keith Hague · Answer

@Bryan Devitt that 10k is after subtracting the initial downpayment and 20k for rehab costs (doing the work myself)

Using the 5%down/5%interest I would be at 28k after subtracting the initial investment.

At 80%LTV I would have 50k equity still tied up.

Making the new mortgage 1100-1200/mo. Rents between 13-16/mo. (I know this isn't amazing cashflow but considering I'm getting an assetthat will grow over time,  it seems good to me and my high risk tolerance)

How should I structure my offer to buy a failed flip

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