While I write mostly about apartment building investing and syndication, I want to write today about how to structure deals when you’re raising money for house flips.
It’s a lot simpler to structure and easier to raise the money than for larger apartment building deals.
As with all real estate investing, DO NOT sit on the sidelines because you don’t have any of your own money – raise it from others instead. I’m not going to talk about HOW to that in this article, but check out How to Find Investors To Fund Your Real Estate Deals to get a better idea how to start.
How to Estimate Rehab Costs!
Estimating rehab costs accurately can make or break your real estate business, and it takes years of experience for even the best rehabbers to master the art. However, you can expose yourself to less risk and get more accurate with your projections by learning how the pros think when estimating construction costs.
How to Structure House Flip Deals with your Investors
If you know how to structure the deal and what the logistics are, you become much more confident and effective at raising as much money as you want for your house flips.
The good news is that structuring deals with investors for house flips is a lot simpler than syndicating apartment building deals. I pay my investors 12% simple interest, they receive a promissory note that is guaranteed by the property, and they receive their principal and interest when the house sells. And best of all, the title company handles all of the paper work.
Because this is easy for people to understand, the perceived risk is low and the returns are great, I found I have no trouble raising money from friends, family and acquaintances with a minimum investment of $25,000.
The trick is that you need to work with a title company that is familiar with handling this type of transaction in the way you want it. Not every title company knows how to do it, but plenty do. You just need to describe it and see if they’ve done this before.
Here’s how the Process works when you Purchase the Property
Let’s say you’re buying a house for $65K and it requires $25K in repairs. Add in the closing and holding costs and maybe a little more for unforseen situations, and you might want to raise $100,000 from investors. If you’re minimum is $25,000 then you’ll need 4 investors.
OK, so by now you’ve found a title company that can handle this and you have verbal commitments from the investors. Now you instruct the title company to create the promissory notes for you. You might have to pay a little extra for this, but once you have one promissory note you can modify it for each investor. You then email it to each of your investors for review.
Make sure you remind the title company that they need to reference all four promissory notes in the Deed of Trust. This effectively collateralizes each note with the property. If the title company doesn’t know how to do this, find another title company.
You instruct each of your investors to send their payment to the title company for deposit into the escrow account for closing. At closing itself, you sign and notarize each of the promissory notes and the deed. The title company records the deed (this protects your investors!) and mails out the original promissory note to each of the investors.
And you then get a check that you can deposit into your bank account that is to be used for repairs and holding costs.
That’s it for the purchase!
What About When I Sell?
When you sell the property, the title company again handles the transaction. They will ask you for a payoff statement, which contains the principal and interest that is to be paid to each of the investors out of the sales proceeds. The title company may have a template for you to use or you create your own.
The payoff statement includes the name and address of the lender, the amount of principal and interest due, and instructions for sending the payment to the lender (check or wire transfer). Usually the title company will require the lender to sign the payoff statement.
Once you have the payoff statement back from each of your investors, you send them to your title company and they will take care of the rest. They will incorporate the payoff amounts on the HUD-1 and send the money to each of your investors.
While you do need to interact with the investors, you’re never touching the cash, and that puts the investors at ease and makes you look more professional.
I hope this article gives you better insight into how to structure deals with your investors so that you can more confidently raise money to fund your next flip.
Let me know what questions you have!