WHY HARD MONEY LENDERS ARE A FLIPPER’S BEST FRIEND
When it comes to the flipping game, your ability to acquire deals with cash is going to determine your success. Like any profitable business, flipping is competitive. So you’ve got to find as many ways as possible to not just stay competitive too… you’ve got to get ahead of the game whenever possible.
One of the things that makes you competitive is offering cash for a fixer upper and being able to do so within 7 to 14 days.
Why?
Well, think about the normal way of buying a house. You find a place and then put a contract on it. You then basically have 30 to 45 days to close. That gives you time to go to 10 banks, fill out lots of loan paperwork and so on. Then at the end of all of that, hopefully for the seller, you’ll have your mortgage and down payment to buy.
Well, when it comes to house flipping, we’re buying distressed and discounted properties, right? So are a lot of other investors. The key is to go to a seller and tell them that you’ll pay their asking price or whatever you determine is fair and do so very quickly without involving a bunch of banks and home inspectors and bullcrap.
That’s where your personal cash and the cash provided by hard money lenders comes in handy.
Let’s take a look at a quick example of a house that you might want to buy and see how the hard money process works.
1234 Example Lane
So you find an awesome deal. There’s a 3/2/2 of about 1,650 square feet in a decent neighborhood. It needs work, though, and the sellers just want to get out and move on without dumping tens of thousands into the place.
They’re asking $90,000 for the property. You know by doing a comparative market analysis that similar homes in the area that aren’t in need of updates and repairs are selling for around $175,000. You also estimate that it’s going to take $30,000 in repairs and updates to bring this property up to standard.
Then of course you’ve got to include closing costs, holding costs and a few other things. You estimate a total investment of $140,000 to acquire, fix and sell this house.
You with me so far?
If your numbers are right, and you can turn this property around in say 4 or 5 months, you’re looking at a potential profit of $35,000. Not bad!
Getting the Cash
Now it’d be great if you had $140,000 sitting around in the bank. If you did, you would probably only need $130,000, frankly. The problem is that even if you actually had that much cash or could use money from an IRA and so on… you could only do as many flips as your available cash let you, right? I mean, you’d have to do 1 house at a time. By using OPM (other people’s money), you suddenly can work on 2 or 3 deals in the same time frame.
That’s the ticket!
So being the savvy and seasoned flipper you are, you go to a hard money guy with the deal. You’ve got a good analysis of the market and a very detailed and accurate rehab budget. The lender looks at your information and agree that he’ll lend you 70% of the potential selling price of $175,000 at 12% interest and 3 points. By the way, points is just a silly banker’s word for percent.
So here’s what you’re looking at:
A loan amount of $123,000
Closing costs of around $10,000
$3,600 in points – i.e. 3% of $123,000
Loan payments, let’s say 3 – $3,600
Okay, so with the loan and the closing / holding costs, you’re looking at $140,200 that you’ll need to turn this house over. Of that number, you need to bring $17,200 to the table.
So where do you get that cash?
There are lots of ways to do this, it’s up to you to get creative here. However, 17 grand isn’t totally crazy to scrape up.
Here are some ideas of where you can get this cash:
Credit cards
Equity in your home
Friends and family
Withdrawing from an IRA or 401K
A Cash Partner
This subject alone could fill a book, so I won’t beat it to death here. If you don’t have any money or you can’t get it on your own, a common way to bridge the gap between the hard money and the final purchase and fix up price is to find somebody who does have the cash.
A Cash Partner
This is actually how I got started. When I began flipping, I was $100,000 in debt and didn’t have a pot to piss in. However, I found a mentor who agreed to show me the flipping ropes for a fee. Well, I didn’t have the fee either… but he agreed to finance his own fee.
After I learned the ins and outs of flipping, I found a partner who had the money but lacked the knowledge to flip. So we worked together. He’d provide the cash we needed over and above the hard money and I’d provide the expertise. We agreed to split the profits as a result… and did around 600 deals together!
You could do the same thing. Find somebody who can get the $17K you need for 1234 Example Lane. You can do a deal in many different ways. Here’s a couple of quick options to consider:
You simply split the profits. On this property, you’re looking at a final profit from the sale of about $35,000. So when it sells, you keep $17,500 and so does your cash partner.
You agree to simply pay him or her a percentage. You tell them that if they lend you the $17,000, you’ll pay them 15% when you sell. They get their $17K back plus $2,550 besides. Imagine doing that 3 times every year, they’re making $7,650 on that $17K – that’s a 45% return!
Before we go, let me say a couple of final words on hard money lenders. A rule of thumb with them is this: be prepared.
The better your numbers, the more accurate your research and the more you present yourself as a savvy and professional flipper, the better the deal you can expect to get. Sure, your first hard money loan might be 12 or even 15 percent plus 3 or 4 points.
Yet if you show them that you know your stuff and can do what you say, you should be able to negotiate much better rates. I personally use several lenders who routinely give me 9 and 2 – 9% and 2 points. These better rates mean thousands less that I need to acquire and turn over a house. It means that the thousands I save go right into my pocket as profit when I sell!
To learn a bit more about hard money and how to use it in your flipping business, I strongly recommend that you download my free Simple House Flipping blueprint. In this concise and power-packed document, you’ll have the same roadmap that I use in my own flipping business right now.
Good luck!