I have to admit, I am a little bit greedy when it comes the house flipping.
I don’t normally like to partner on many deals at this stage of my career but every once in a while when our deal flow is not as robust as I think it should be, I reconsider this whole concept of having partners.
But partnering is just another GREAT way for new investors (and grizzled veterans) to flip houses with no money.
In a post here a few weeks ago, we talked about three case studies for flipping houses with no money. So here on case study #4, we’ll get into a little bit more in-depth on how it all came together…especially you cynics who still think you can’t flip houses with any money of your own :-).
As you’ll see, it absolutely can…even if you are BRAND new to this whole flipping houses thing.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
Flipping House with No Money Case Study #4
About four months ago, a couple of guys approached my acquisition manager Bill Roberts about a deal that they had. They were interested to see if we would be hard money lenders for their house flip.
Bill politely declined but recognized that there was an opportunity here for a potential acquisition for us.
These two guys were relatively new in the business and although they didn’t have the connections to get the money they were looking to borrow, we did not that wouldn’t be enough for us to even consider doing the deal.
So instead of completely casting this potential house flip aside, I told Bill to invite them down to our office so we can meet with them face-to-face.
So down to our office they came…
The Importance of ARV and All Other Costs
As soon as I met these guys, I immediately liked them both. I recognized that what they lacked inexperience they made up for in enthusiasm and ambition. I tend to like go-getters like this regardless of experience.
So we started looking into their projections. The big number that stuck out to me was their cost of repairs, which having talked to them a little bit about the house, it seemed to me their numbers were a bit on the low side.
Aside from that, they seemed to have nailed the ARV pretty well. I happen to know that market and it seemed reasonable.
Their ARV was just about $300,000, they had used the 70% Rule correctly and their renovation costs were just over $37,000.
I don’t exactly recall how much they had wrapped up the contract for, but I believe it was about $175,000. Now that I think of it, it may have actually been $185,000 that they had wrapped it up for.
But for the sake of argument, let’s call it $175,000.
So the math looked a little bit like this:
70% Rule: $210,000
Renovation costs: $37,000
Net profit: ~$60,000
On the surface, this deal looks like a real winner.
But not so fast…
50% of Something or 100% of Nothing – Which Would You Take?
So we started negotiating. They wanted a 50-50 equity split, which for them was a pretty good deal for them. I always recommend doing this when you’re first getting started.
For them, they would get our expertise and our money and they would get 50% of the deal.
Bill and I talked about it and we felt that because we’ve done quite a few more flips than they had, we felt a 60% split was far more reasonable.
After all, we were bringing a fair amount to the table: expertise, experience and most of all cash from one of our private lenders – which we could secure with a single phone call.
Although they probably would’ve liked the 50%, but they realized that this was a pretty good deal for them at 60%, so they took it.
At this point, I didn’t have an opinion on their original repair costs when we negotiated the terms of the agreement. I took those numbers purely at face value.
Renovation Costs… The Silent but Potentially Deadly Killer
The next day we drove out to the property. And that’s when things changed and we then realized how off base their repair costs really were…
Although we were extremely impressed with their cost of repairs estimate (it was neatly typewritten instead of scrawled in pencil on-site) – looks can be deceiving.
As soon as we started making our cost of repairs estimate, a very different picture started to emerge.
Just compare their renovation numbers versus theirs:
Our numbers were nearly DOUBLE theirs. Oh boy…
This is how critically important getting your repair cost right are to making money on a house flip!
We came back to them and told them that the deal was off unless we could get the property at a significant discount. That number for us was a Maximum Allowable Offer (MAO) of $135,000.
The CRITICAL Importance of Nailing Repair Costs
Bill coached them through how to go back to the seller and what tactics to use. He obviously did a pretty good job talking them through negotiations with the seller. I’m not exactly sure what he said, but whatever it was…he should bottle it up and sell it!
Quite honestly at this point, I thought the deal was totally dead!
Remarkably, the seller DID reconsider and knowing they were dealing with seasoned investors, they did in fact agree to sell it for our price.
The math more realistically needed to look like this:
70% Rule: $210,000
Renovation costs: $75,000
And thanks to some last-minute negotiating advice from Bill, the numbers did in fact, come out looking like that. Here is what the end profit breakdown looked like:
Soft costs: $30,000
Net profit: $60,000
Our take: $36,000
Their take: $24,000
Not too shabby for them AND for us.
New Investors – Don’t Be Afraid of the Partnership Deal
As you can see from the numbers, everyone walked away pretty happy. We were happy, our hard money lender was happy and our new house flip partners were happy as well.
It’s worthwhile to note that these investors did have another money guy lined up prior to meeting with us. They were going to do at 50 – 50 split with him and he had not realized how far off the repair costs were.
Had they done the deal with him, they probably would have made little or no money. They may have even lost money.
If you borrow money from someone who may not have the experience to verify your numbers, then you MUST verify your ARV and repair costs 1000% or you won’t make money.
The moral of the story is this: if you partner with someone who has more experience than you, take less if you have to. In the process, you’ll learn and gain so much more to start you on a successful path.
And if you do, make sure you verify your ARV and repair numbers 1000% or you risk losing credibility.
Once Again, Flipping House With No Money in a Different Way
And yes…these brand new investors DID flip this house with no money.
So for those of you who think flipping houses with money CANNOT be done (I know who you are out there), it can be done – in fact, it happens all the time. We do it ALL the time.
If you don’t have the money – someone else does. It can be a hard money lender, it can be a private money lender or it can be another investor like us.
So keep all your options open and be creative. It can get done if you think it can get done. And if you’re new, take less, learn and then move on to your next flip.
Then on the next one, you probably won’t need a partner and you can take it all the profits yourself…just make sure you nail that renovation cost!
If you’ve made it this far, please leave a comment below! What do you think? How have you made money flipping in unconventional ways?
Please leave a comment and share your experience or ask me anything you’d like about flipping houses below!