Help! Can I flip w/ bad credit?

Question

Hey guys,

I need help and I wouldn't trust anyone but me fellow Pocketeers to advise me.

I'm 21 and my credit score is laughable and rather embarrassing ( go ahead and laugh at my pain, it's ok ).

Mentally I feel ready to begin investing. I know there's still an immense amount to learn. But I feel the best way to learn is by getting my feet wet. Have to start somewhere, right?

My goal is to start flipping... I'm handy ( more than the average hammer & nail beginner ), I learn fast, and I enjoy the hell out of it. I can't see myself doing much of anything else besides this.

However, my credit is so poor my loan rates will either be tremendously high ( how much will this hurt me if i'm not buy & holding but aiming for a 90 day flip? ) OR I won't even be able to receive a mortgage loan.

There are multiple properties I have located ranging from 275k -550k in the Denver market which we all know is crazy right now. I have my sights and heart on the 4b2b for 550k (I can probably get it for a less due to it's condition and needed reno ), the house is in poor shape, the resident is a stage 10 CODE RED hoarder, but in the perfect neighborhood. Comps across the street are between 630k-725k. The potential is absolutely there. 80-100k profit depending on the rehab budget.

All that is nice and fun but meaningless without the ability to get a loan or backing.

What should I do? Hold out for another property until my credit score rises or find other means?

How much will the rates effect me on a 90 day flip?

Does credit only play a role in time?

Please, point out each and every flaw or hole. Only way for me to learn and grow.

Anson Young · Answer

You have a few uphill battles you are facing (arent we all?)...

To answer the initial question: can you flip when your credit is bad.

Good news!  Yes you can!  But (there is always a but) the obstacles just compounded on you.

Mortgage loan - probably out of the question, due to the credit score and what I'm assuming would be lack of down payment.  A conventional mortgage loan will want to see good credit and want 20% down or so.  On a 500k purchase, thats $100k out of pocket.

Hard Money - getting closer.  Some dont care about credit score, but may want to see investor experience or that dreaded 'track record'.  They may care more about the deal than the borrower, but at the end of the day that borrower will have to have the experience under their belt in order to manage/do the rehab, and actually sell the property for a profit.  Some require down payments as well, so if you have no credit AND no money, you might be out of luck again.  Some want to see cash reserves as well, so down payment plus $15k in the bank kind of thing.

Private money - even closer, but here they very much care about track record.  My lender has never run my credit, never even asked about it.  I came with a small track record and good deals, which is most of the battle.

Partnership - They have credit/financing/money and you have the deal.  This could be a great way to get started in flipping.  Its how I got started, no money or credit but worked my butt off to find deals.

Wholesaling - if you cant figure out what to do with the properties you are finding and cant take them down yourself, why not sell them to an investor who is looking for deals?

I flip full time in Denver, and have never sold a property for more than $300k ARV, my initial thought is you might be swinging a little over your weight class.  500-700k is a whole different world and a ton of experience and detail above the entry level houses in/around Denver.  Not to say you cant start there, but its much easier to get financing/partnership/whatever at a $150k house than a $550k house.

Let me know if you have more questions.   We also have a monthly BP meetup in Denver, just search "Denver Meetup" in the search bar and come find us!

Jacobo B. · Answer

@Zachary Gwin

Do you have cash? If so, how much? Regular banks won't lend you because of your credit and the condition of the property. You'll have to go through a hard money loan which won't see your credit that much but it will ask you anywhere between 25 to 40% down and will charge you 12 to 15% annually.

Now, if you don't have the money, look for partners. Prepare a plan of action, do your numbers and present it in a professional matter and split the profit after the property is sold.

Travis Sperr · Answer

You can flip with bad credit - we make loans to flippers with less than stellar credit regularly. You will need strong liquid reserves to overcome your credit and experience. You might consider wholesaling the deal or finding a partner that can fill the gaps you bring to the deal.

Based on your post you aren't going to get a conventional mortgage -credit and short term intent being the biggest two items.

Look for hard or private money lenders that might be willing to work with your situation.

Marcela Correa · Answer

Hi Zachary,

Remember to include closing costs in your calculations! They're a factor in the purchase and a significant expense on the resale!  Even if you have a real estate license, you're still paying commission to the buyer's agent, taxes, and fees. All of these can eat into what seem like thin margins to me.

We're experienced contractors and because of it, we always include a 10% contingency budget in our rehab costs. There are always things we cannot control and we prefer to have budgeted for them.

If you haven't already, you should read J. Scott's book on estimating rehab costs.

These are just tips so you can make the best analysis of the deal and a solid presentation to potential partners.

As for your 203k question, the lender will still run your credit, work history, etc. Only way to know for sure is to apply. Ask the loan officer to give you the max amount for which you qualify so you can use that as a limit in your shopping. If you decide to go with a 203k, be sure to find a contractor that has solid experience with 203ks.

Best of luck

Zachary Gwin · Answer

@Anson Young

Thanks for the great reply. I just moved here 2 months ago and think I'm ready to start hitting up some local REIClubs!

I have one last question for you. Now it wouldn't be the ideal "house hack" but could I get an FHA (3.5% down) take the vacancy expense for 2-3 months (3-5k) until I get the place fixed and liveable and live for the remainder of the year till the FHA is up? Which in that case would it be more beneficial to just hold on to it?

Zachary Gwin · Answer

@Jacobo B.

A partner seems like the best way to go. Thanks!

Zachary Gwin · Answer

@Travis Sperr

Thanks Travis, I'll definitely look into finding a partner.

Christopher Brainard · Answer

@Zachary Gwin

While it is unlikely that you will get conventional financing through a bank, you may be able to secure some hard money, if the deal is good enough. The deal outlined above would not qualify with any lender I know and the margins look thin at best. Typically, you need to find a house that will be valued at 70% of the repair value after the cost of repairs is taken into consideration. So if the house above is worth $700k and the repairs are $80k, you should be looking to buy  around $410k. Even at those numbers it may be a hard sell, as you don't have a track record or personal assets.

The other option is to look for someone with money to partner up with - friends and family are usually the easiest place to look but often the hardest to work with.

-Christopher

Zachary Gwin · Answer

Also let it be known, I am aware that I have much to learn and will never dive into a project or an investment without truly understanding all the loops and hoops (well most of them). Just another step in the ever learning process :)

Thanks guys!

Help! Can I flip w/ bad credit?

Most Popular Reply