All Forum Posts by: Jeff S.

The 70% rule-of-thumb has been around for years, and it works for flips, @Ryan Boutin. Here's how to use it: Add the purchase price and rehab estimate together, and the total should be less than 70% of the after-repair value (ARV). For higher-value properties, say over $250k to $300k in ARV, you can push it up to 75%. Those who dislike the formula usually do not understand why it works or prefer to rely on intuition. It's only math, and it works.

I demonstrated the typical calculations from our spreadsheet in this recent thread: Costs needed to keep in mind for a flip.

You cannot let your purchase price and rehab costs total 85% of the ARV. Sales commissions will add another 5% of ARV, while loan charges will typically add another 5%. That already adds up to 95% of the ARV, without considering other expenses such as escrow purchase and sale, property taxes, transfer taxes, fire and liability insurance, title insurance, utilities, staging, and more. This means you'll exceed 100% of the ARV, leaving no room for profit.

Deals will not “… make sense at 80% or even 85% depending on how much rehab (if any) is needed …” because the rehab is already included in the percentage. Similarly, if you're rehabbing $350k properties, aiming for a profit of $50k on each property might make sense (and I've flipped properties in Cincinnati). However, it doesn't make sense for an $800k property, where a small market drop or a reasonable counteroffer could eat up the $50k profit. That is, assuming a fixed dollar amount for your profit only works if you assume a fixed ARV. I doubt the ARVs are fixed in your area.

Nor do we use ROI. The reason is many borrowers are experienced and can borrow all or nearly all of their purchase and rehab money. Thus, whether their profit is $1 or $100,000, their ROI is infinite.

A good deal for us is where the rehabber earns 12% to 15% of the ARV in around 6 months. This won't happen if your purchase price and rehab cost total 80 to 85% of ARV. Do the math and stick with 70% (or 75% for >$300k properties). Use it for screening only and when you run all the numbers in detail, as you must, you'll see that it makes sense.

 Sorry.  Double post.

Your solo 401k is a separate entity from you, @Cliff T. It is a trust. Just like a corporation or LLC, it can lend money, so your trust's name, not yours, would appear as the lender on your loan documents. This process is super easy after the first few loans, and we've been lending both our after-tax and Solo 401k money, secured by local house flips, for years. You, as the trustee, are allowed to manage the loan, but you cannot take a dime from it until you begin taking disbursements – typically at retirement. Since the money is either tax-free (Roth Solo 401k) or tax-deferred (Traditional), your balance will grow very quickly, especially at hard money rates.

Sorry if I confused you, but I was responding to your question about whether you can personally partner with your solo 401k as co-lenders. In this case, you cannot because you are considered a disqualified person. Disqualified persons include you and your lineal descendants (mother, father, grandparents, sons, daughters, grandkids, etc.). Lateral relatives, such as brothers and sisters, are fine.

The other issue I mentioned is a bit more technical and has nothing to do with who the lender is. If there is more than one lender on a deed of trust, then the loan needs a security exemption. Fortunately, California provides this if a CA-licensed broker is used, who follows the rules for originating fractionalized loans. You will need a broker anyway if your interest rate in CA is greater than 10% APR.

Your solo 401k aside, I strongly recommend that you SEE A LENDING LAWYER before you start lending money. Lending law is complex and varies from state to state, so it is essential to have a lawyer who is familiar with the regulations. You don't know what you don't know, Cliff, and you're not going to get it all here.

Last, do not get your loan documents from a title company. Do not. Title companies are insurance companies. They employ many lawyers who work for them, but these lawyers do not represent you. Instead, hire a lawyer who specializes in lending to draft your loan documents and educate you. As a courtesy, you might get a simple note from a title company and a short-form DOT, but this is not even close to a complete loan package and will not fully protect you or your 401k. With all the automation and competition among lawyers lately, prices have dropped for loan documents. Understand that your borrower will typically pay for these anyway.

1. The answer is not an easy Yes but a hard No, @Cliff T.  As a disqualified person, you cannot personally profit from any investment made by your Solo 401k. This means you cannot personally co-invest with your retirement plan. (As an aside, if there were two qualified lenders, the loan would have to be fractionalized. This is legal in CA but would require a broker.)

2. Assuming the money resides in a trust account at a bank or equivalent, and that you have checkbook control (i.e. this is not a stock and bond brokerage 401k) then yes, you would wire the money to title after all documents are signed, reviewed by you, and evidence of proper insurance is received.

3. Yes, except it would be the title company. They would wire all funds back into your 401k account. With a few notable exceptions, such as a personal loan, you can’t touch any of this money until you’re 59 ½.

4. This is a completely separate topic. There is a lot more to a loan than a note and DOT. If this loan is in CA, and the interest and points total more than 10% annualized, your plan will need a licensed CA real estate broker to originate the loan. There will be lenders instructions, disclosures, a title prelim review, personal guarantee (if you're wise), 1003, occupancy affidavit, use of funds statement, and lots more. You should really sit with a lending attorney to learn the basics of making a private loan, including licensing ad usury, and an understanding of the required paperwork before you agree to lend like this, Cliff.

In general, the paperwork and process for lending money from a Solo 401k is exactly the same as for any other private loan. The only difference is that you can’t personally touch the money.

Your categories are too broad, and you are missing many expenses, @Gerardo Lewis. Here’s the P&L detailing typical expense estimates from the spreadsheet we use to evaluate our rehab loans. Don’t pay attention to the numbers but to the categories.

Click on the image to expand it.

The escrow purchase and sales fees are your purchase and sales costs. The conveyance tax might be called transfer taxes if you have anything like that in your area. Notably missing from this table are staging costs, which everyone here now seems to be doing, as well as anything specific to your area.

Note that this is your gross profit and doesn’t account for your personal tax situation. How could it? Nor is it applicable to buy & holds or any other sort of rentals. Flips only.

If you are borrowing your money, ask your lender for a similar spreadsheet. All credible HMLs should have something like this to confirm you have a good deal. Extra points if you write one yourself. This will ensure you know your numbers.

It’s important to be conservative, Gerardo, and understand that everything will cost more than you think and that your project will take longer than planned. This is some sort of natural law.

Good luck to you.

Borrowing money from friends/family/etc. uses exactly the same process as borrowing from any other hard or private money lender, @Chris Berra. There is no template for this. As lenders, your friends or family members should speak to a lending attorney, knowledgeable in the state you are borrowing, to get a top-level understanding of the law, the risks, and the processes, as well as to obtain a set of vetted loan documents that can be used to lend you money. Of course, you should sit in on this conversation, so everyone goes in with eyes wide open and with the same basic understanding.

In some states, you can originate these loans yourself. In others, it might be illegal. Yet others might require a license. With over 100 projects under your belt, I’m sure you understand the risks your friends and family might be taking. Asking them to lend you what could be a life-changing amount of money would be completely unfair without the protection of proper loan documentation and their understanding of what they are getting into.

California (ok, cue the eye rolls) requires that all brokered construction loans over $100k be fully funded and escrowed to avoid the draw money from disappearing when you need it. That is, the lender must send the entire amount of the construction loan to a neutral party, such as a loan servicer or funds control company, before the deed of trust is recorded and with clear instructions on how it is to be disbursed (or reclaimed by the lender) using a draw schedule.

Whether required by law or not, you should always expect this of your lender and no credible lender should have a problem with it. Most will charge interest on the entire amount anyway.

Escrowed construction money only guarantees the funds are there, not that you will necessarily receive them. There are always two sides to every story and, as @Jay Hinrichs mentioned, you must still do your part to show the construction work was completed properly and that you are still in compliance with your loan.

With the various stories, I don’t know who all the bad players are above, but this thread is 4 years old and with 7 posts, I’m sure at least the OP is long gone. Nor do I know specifically who @Chris Seveney is referring to, but I agree with him it’s clear that there are several lenders on this board (and they come and go) who are playing games and not anyone you want to do business with.

It’s a shame that with all the money BP charges, they don’t actually vet their lender list. Seems that should be part of the deal. Of course, this doesn’t exonerate the bad guys.

It takes a bit of work to use ChatGPT, but not much, @Kim Hopkins. You should assume it’s like an expert sitting alongside you as you work and with whom you can ask questions, point out errors, and ask for clarifications in real-time. It’s the weirdest experience because I must continuously remind myself it’s not a human being.

If you don’t like the response or it doesn’t do what you want, you can either edit and resubmit your original question by clicking the edit button on the right, or ask a follow-up, or simply point out a mistake. ChatGPT will come back, apologize for its error (creepy!!!), and suggest a workaround. If you don’t understand its response, say so and ask for clarification. Perhaps take a step back and instead of constraining yourself in the direction you’re going, ask ChatGPT how it would solve your problem. Don’t take no for an answer and don’t get frustrated. I can see you are.

I don’t use Google Sheets and I don’t understand your problem enough to help you technically, Kim. Sorry. I was simply offering a place you could go for help quickly because I really do think you’re on the wrong website for this. Up until ChatGPT, I would use some of the online VBA message boards for help. It could take days to go back and forth and still not resolve my issue. Now, I’d hate to be an owner of one of those message boards.

You’re asking the wrong website, @Kim Hopkins. We have an Excel spreadsheet we use to evaluate loans, calculate returns, break-evens, create invoices, generate payoff demand letters, and lots more. It’s been a work in progress for many years and I constantly update it with some hard-learned Visual Basic (VBA).

I started using ChatGPT recently and it’s been amazing. As long as I can clearly explain what I want, ChatGPT instantly creates the VBA. It works 98% of the time. Modifications that might take me days now take an hour. It’s also fun.

I cut the problem you defined and pasted it into ChatGPT. Here’s the answer:

In Google Sheets, it is not possible to directly add a calculated row to a pivot table. However, you can use a workaround by adding a helper column to your source data and then use that column in your pivot table to create a calculated row.

Here are the steps:

1. Add a new column to your source data and label it "Profit".
2. In the first row of the "Profit" column, enter the formula to calculate profit for that row (e.g., "= Income - Expense").
3. Copy the formula down to all the other rows in the "Profit" column.
4. Refresh your pivot table to include the new "Profit" column.
5. In the pivot table, click on the drop-down arrow next to "Rows" and select "Create pivot group".
6. In the "Create pivot group" dialog box, enter a label for your new row (e.g., "Total Profit").
7. In the "Formula" section, enter the formula to calculate the total profit for all properties (e.g., "=SUM(Profit)").
8. Click "Create" to add the calculated row to your pivot table.

You should now have a calculated row in your pivot table that shows the total profit for all properties. You can repeat these steps to add additional calculated rows as needed. Note that any changes you make to the source data will be automatically reflected in the pivot table, including any updates to the helper column.

This makes me wonder how ChatGPT will change the lending business and real estate investing in general. 

Well, I do agree that you should educate yourself, @Nicole Haydt. But CA is far from notorious for having the most strict regulatory and lending requirements in the country. Not sure where that comes from. Check out the  lending requirements in Nevada. 😱😱😱

To call yourself a lender in CA, you must be licensed in CA. This generally means a CA Real Estate Brokers license thru the DRE or a CA Finance Lender’s License thru the DFPI. In CA, you do not have to register with the NMLS, which by the way is not a license, unless you are making consumer-purpose loans. Similarly, a Mortgage Loan Originator (MLO) license will not help you since you will not be working with homeowners.

Licensing will depend in part on where you get your money. I also assume you will only be making business-purpose loans. That is, the use of the money will NOT be for personal, family, or household use. This means that owner occupancy is all but irrelevant (but try to get anyone on BP to understand that).

A CFL license will allow you to lend your own money, like my wife and I do in CA, or that from a mortgage pool you might run. That is, you are a “balance sheet” lender. This license restricts the sale of your loans to other CFLs only and to some financial institutions if that's your intent. You not only get the CA usury exemption, but you also do not have to comply with SB978, which applies to licensed brokers. Look it up. This is a big deal.

Obtaining a CFL license only requires an application to the DFPI. It costs a few thousand dollars and I’m told that lately, it takes around 6 months. There is no test and no apprenticeship. Once you get the license, you’re good to go.

A CA Real Estate Brokers License, as you seem to know, involves a series of classes, a test, and then a few years working under a broker. It’s the least restrictive license since it allows you to transact real estate, hire and fire RE agents, and make and arrange RE loans to the public.

A brokers license allows you to transact loans to anyone whose qualified and also to originate fractionalized (multi-lender) loans – another big deal. Qualification is subject to SB978.

Of course, you can lend money in CA without either of these. If both you and your borrower are qualified, a licensed real estate broker can originate your loans for you. In fact, we still use a broker for loans we make through our retirement plan since it is not licensed. This is another distinction of a CFL. Your LLC or Corp will be licensed, not you personally.

If I agree with anything above, it’s that you need to get educated from someone who knows what they are doing. That means, not me. HA. I would call Geraci Law Firm, located in your backyard -- Irvine. Meet personally with Melissa Martorella for maybe an hour (@ $595/hr -- Yikes). She will explain the basics of a private loan in CA. This will include, usury, licensing options, business-purpose/consumer-purpose loans, paperwork, owner and lender’s title and insurance, hazard and fire insurance requirements, personal guarantees, loan mods & foreclosure, and much more. Bring @Robin Simon and @Jay Hinrichs, above.🤣

Last, ignore all of this. Gap loans are as dangerous as they get. You are lending in second position to undercapitalized borrowers. If this is because you don’t have much money yourself, then wait until you do. My strong advice is that if you don’t have enough to lend in first position, you don’t have enough money to lend. On the other hand, if you have a lot of money and can afford to get wiped out on occasion, then go for it.

Good luck to you, Nicole.