First Flip - HML worth it?

Question

Hello,My business partner and myself are aiming our sights at our first fix and flip property; we have money set aside for the project - but due to the amount we are willing to invest it limits some of our capabilities (can't buy in cash). Out of curiosity, I spoke to a hard money lender yesterday to see what they could provide us. I thought that if we used a HML, it would allow us a wider range of projects to pick from.Their requirements are experience based; of which we don't have any in the flip market (we are buy and hold). -Must purchase at 60% ARV or lower (is this possible in todays market?)-3.5% origination fee-11-12% interest-12 month term (shouldnt be an issue)-They cover 75% of purchase and 100% of repairsThese numbers change pretty drastically once we have 1 deal under our belt, and then even more after 3+ deals. The problem is, that those numbers seem expensive, and buying at 60% ARV or lower, seems like it might be like trying to find a diamond in the rough.So the big question, is it worth it? Would those numbers make sense for a first timer - just looking for opinions. Thanks!Kyle

Bob Woelfel · Answer

@Ali Akhter yes that can be true. Think of it this way. A hard money lenders sole purpose is to work with investors and help them do deals. Most, if not all legit HML's are investors themselves. We are a second set of eyes. We look at the project, look at the budget, look at the numbers and get appraisals. If something is not right or the rehab budget is too low or too high we can make suggestions or ask questions. We require signed lien releases from contractors as well so we can help protect ourselves and our investor clients. We won't be there swinging the hammer obviously, but I do feel like we provide a significant amount of value to investors over and above just the financing part. A private money lender...say a friend or family member is many times relying on you to be the expert. After all, you probably went to them and said you were flipping houses or involved in real estate...blah blah blah. So they told you they have some money they might be able to invest. They are typically going to want to be hands off, otherwise they would do it themselves or at the very least set up a partnership with you and hopefully get more than the interest rate for their return.Hope that helps.

Bob Woelfel · Answer

@Ali Akhter I would try to meet lenders at your local REI meetings. Get to know them and ask questions about the process and what they do or don't do throughout the process. Some will just do the deal and that's it. Others will try to offer some assistance, even if it's just another set of eyes. Good luck.

Michael Ablan · Answer

@Kyle Coleman Expensive is the name of the game when it comes to hard money. However, it allows you to do deals you wouldn't be able to do without it. Maybe reach out to family and friends and see if you can pool private funds together to do it? Pay 8-10% flat rate interest, no points.

Caleb Jordan · Answer

If property needs cosmetic work, maybe some maintenance it could still be livbable. You also have conventional rehab loans, 203k or homestyle. However they take a long time to close, must vett contractors, and I hear paperwork is arduous etc. It is an option and could save you money. But you also have to consider what your time is worth. Both in terms of hours it takes to gather docs, application etc and weeks it takes for a bank to close a loan. Hard money even though more expensive in $$$ is much less costly in time. both in the time you put into gathering docs etc and then time in processing loan.

Kyle Coleman · Answer

Thanks - I'm going to do that, this was just the first one I tried. Is it reasonable to try for conventional loans to do a flip? I think that Fannie and Freddie require that the home be "livable" to qualify, which would take a lot of properties out of the equation.

Caleb Jordan · Answer

Call some more HML. You might find one that is not as experienced based or puts more weight on credit etc. 60% of ARV seems low usually it is 65% to 75%. Points and rate seem reasonable, but I've definitely seen better especially with 25% down.

Syed H. · Answer

Honestly for a first time flipper 60-65% of ARV is fine.Also, remember when you do your renovations numbers that your numbers will be higher than seasoned flippers by a good margin. Also don’t forget all the frictional costs (transfer tax, lawyers, brokers fee; etc), utility costs, taxes; etc etc.

Ali Akhter · Answer

@Bob Woelfel thanks for your help and advice! I'll check out my local REI meetings.

Jake Riordan · Answer

I went to them for the first time a few months ago & it was 10.25 & 2.25, depends on the deal I believe.

Kyle Coleman · Answer

Do these numbers depend on flipping experience?