Success--Pulled the Brakes on Another Deal

[Page Huyette]

Earlier this year I posted about another deal that didn't fly and why I viewed it as a success. This time the story is a little different but a success just the same.

Last time around we went under contract for a home we intended to flip. I got my spouse on board and found a private investor to fund at least part of the flip. Also found a mortgage broker willing to say "let's try" out of the gate, rather than no no no. Securing those local bank relationships was a major victory.

Based on that previous experience I tried something different this time around. I found an REO property that needed a lot of work but had the charm, lot size and potential profit make it worth looking at. Running the numbers I found it could cash flow as a rental as a back-up plan. Before making an offer, I contacted the two bankers I'd had reasonable success communicating with in the past about the deal:

$50k purchase price

$30k in repairs

ARV $110-125k

Not the deal of the century, but the low entry price point was irresistible to me. It was a doable flip. But this time, I didn't make an offer until I'd secured financing, which I did (at least a pre-qual). On the day this property came on the market, I received a phone call from one of the bankers with a thumbs up on a construction loan for $85k as a second home property for six months, at which time it would roll over/refinance into an investment loan. This loan required 20% down from our pocket.

Why didn't I jump?

I wouldv'e been required to hold the property for one year because it was an REO. I had to qualify for the loan without using rental income, since one can't purchase an REO within the first 14 days as an investor. The mortgage, taxes and insurance were pretty reasonable, but still money going out instead of into my pocket.

Taking into account these holding costs before I could sell or rent made the deal not so hot.

We couldn't do any of the repairs based on the parameters of the loan, making it a deal I'd have to manage pretty closely. The time requirement to do this made this smaller deal look even less attractive.

I wouldv'e liked to take on this property, then do a lease purchase option. It was very difficult for me not to throw some sort of hat into the ring with that pre-qual, but I held off. I get pretty focused when I want something. But I held off.

I never even looked at the property in person.

Next time something like this comes up, I'll try to work out a deal where I don't have to put 20% of my own money down, and can gain the equity in other ways. Bank financing will be the back-up, not the primary financing option.

Getting that call from the banker was an incredible feeling! Even though I didn't move forward, it gave me the confidence to know that something will come together soon.

[Wendell De Guzman]

If you have a property like that, I will jump on it and "pull the trigger" even if you don't have the cash or even the financing. Why? I believe in the matra: "If the deal is right, the money follows." That's just based on experience and having done over $10M worth of property acquisition in the past 10 years.

I would put the house under contract and mention I am buying it "cash" in the financing section of the contract. Here's how I will exit:

1. Wholesale it for $55K. By doing this, you will meet other rehabbers in your area as well as other wholesalers. In the worst case you are not able to wholesale the deal, you will have learned how to market properties and you will have build your buyers' database.

2. At the same time you're doing #1, approach several Hard money lenders. They will lend you up to 70% LTV (value being the ARV). Conservatively, they will lend you $77K (70% x $110K).

3. At the same time you're doing #2, look for equity partners who can give you the rest of the money you need (cost of rehab, points, holding costs).

4. At the same time you're doing #3, if your credit is good (660+), you can look into P2P (peer to peer) lending to fund the rest of the money you need in case #3 does not work out

As you can see, the key to success is to make offers and once you get an offer accepted you have to work your behind off to get that offer closed and make money from it.