What is the best way to structure a Buy/Fix/Flip on a close friend's condo?

[Jeffrey Yates]

Friends of ours are going to close on a new house in approx 60 days, so they need to sell the small condo where they've been living. They've lived in this condo for 2+ years, so in order to sell it, they'd need to replace carpets at a minimum, which is a hassle for them. They're the kind of people that prefer convenience and ease, even if it costs them a few extra dollars. Other value to him includes my being flexible with timing of purchase to avoid any overlap on mortgages, and no need to fix anything or clean anything up (a big plus for them!).

Thus, my proposal: Sell me the condo at market value less cost of repairs, less realtor commissions (saving us 6%), have our RE lawyer friend do a “minimalist closing”/quit claim (saving us some closing costs), and then let me rehab, upgrade the floors and resell the condo at a higher value 60-90 days later. He gets the money he would have walked away with on a straight sale for no work whatsoever, and I get to take home the added value over cost of improvements.

I've done all the numbers (ARV, FARV, COR, etc.) and am comfortable with our margins.

Here’s what I need your help on, BP:

What is the best way to structure this deal?

My friends needs a good chunk of his net proceeds from sale of condo to pay for repairs on the new house.

I need at least some of the purchase price financed, even if only for 90-120 days (conservatively) until the time of the sale.

How can I meet both those needs as cheaply as possible? Maybe by giving my friend a lease option that explodes in 120 days with a downpayment equal to the cash he needs for the new house? What do you call that, a "deferred close with occupancy?"

Also, I’d like to minimize the transaction costs as the property is sold from him to me, because every dollar I save my friend by selling to me (vs selling to a 3rd party) reduces the price I pay for the property.

This is a true friend, so I have zero trust issues and am 100% comfortable with doing the initial sale as cheaply (even if it means unprotected, deed-wise) as possible, AS LONG as it doesn't complicate the eventual after-repair sale to a third party by me.

Hope that’s clear! Thank you BP!

[Jon Holdman]

This does not make a good enough deal to do a fix and flip:

The rule of thumb is that your purchase plus rehab costs needs to be under 70% of ARV in order to make money. If you hit that target, use hard money to finance the deal and hold for six months from your purchase to the sale, your profit will be about 13% of ARV. This is just math.

The sellers costs don't factor into this equation because the seller pays those.  So avoiding commissions when you buy doesn't help your end of the deal.  It does put more money in your friends pocket.

Some closing costs you need, like title insurance.  Do a "hold open" so you can just update the policy and pay only the difference when you sell.

If you can reduce your money costs, that improves the results.  Hard money for six months is going to cost you about 10% of the amount you borrow.   If you buy the house subject to, you can use the existing mortgage to hold the place at a lower costs.  There is a risk of it being called, but if you in and out quickly you can sell before the lender can complete a foreclosure.  The bigger risk is the ability of your friend to qualify for the new loan while still being on the old one.  Is that a problem?

If you can keep the existing loan and fund the rehab out of pocket your threshold is now more like 75% instead of 70% because your avoiding hard money costs. You are incurring the interest on the existing loan, so you don't save the entire 10% of purchase plus rehab (which is 7% of ARV, assuming purchase plus rehab is 70% of ARV).

Where are you as far as the numbers?  There's no magic here.  Any money you make is coming from your friends pocket.   Are you able to buy it cheap enough to hit that 75% number?

You might be able to do the deal even thinner if you're willing to cut your profit. But, these numbers are telling you that if purchase plus rehab is 90% of ARV (and you have to get ARV right, its the price you get when you sell) you're going to lose money on the deal. At 85% you'll just break even, if nothing goes wrong. And things always go wrong on rehabs. So, I'd say unless you're under 80%, able to buy subject to, and willing to do this deal with a chance of no profit at all, don't do this.

Realize, too, that if you make a profit on this deal, you may lose your friend.  Anything you make is truly coming from them.  Because they could easily pay someone to fix it up and pocket that money.  They may be OK with convenience now, but they may not be so OK with it if you later wave a $10K check under their noses.