I Can't get financing for a flip. Great credit, great down payment. Any ideas?

Question

Hi all, My name is Bob new to BP. I live in the Boston area, 15 minutes south of Boston. I am trying to get financing for my first flip, and have been shot down by 3 banks for a 30 year fixed rate ( not sure if this is the right approach). I talked to a hard money lender and he said he would give me some financing with 2 points, and 12% interest, I did the math and it seems like I would be paying 10k to borrow the money for 6 months, and more than that if I borrowed longer. I have a credit score of 776, I have 70k in the bank, 112k in my annuity, although annuity doesn't seem to matter to the banks I've talked to. I work fulltime, same company for 10 years. I make about 70k a year base pay. Here is the tough part, I own my primary residence (purchased for 341k, and owe about 270k now), and also have a rental property in NH (purchased for 125k, and owe about 90k) that shows a loss on my taxes. I am married and my wife is a nurse but she wants nothing to do with a flip so I understand. As odd as it sounds we don't combine our money. She makes what she makes and the same with me. We only pay mortgages, and bills together, and we file taxes jointly. It has been a perfect system for us. My credit card debt is low, 4k max. I have been wanting to get into the real estate market for years, have done years of saving, and researching, I have about as strong of an understanding of flipping house as you can without actually doing one. I have a sound mind, college grad, great work ethic, no slouch here. Anyone out there that can give me any ideas? I'm not looking for anything gimmicky or something that over extends me. Any info would be appreciated. I was hoping to have a house on the market by May, but now I feel like that is dwindling. Ok thank you for reading.

David T. · Answer

@Robert Anderson, I would say that these are just issues that crop up when you're trying to do your first deal. I would also say that your best move is to adjust your perspective and take a slightly different approach.

Your first deal is always going to be a pain and if it's not one thing, it's another. While a partnership is always costly, it's really hard to make money on your first deal playing solo and very few of the experienced flippers on here can honestly tell you they made money out of their first one. This is a risky business and mitigation of risk is at the center of it.

If you can find an active and experienced partner who will allow you run this deal hands on for the experience I'd say that's an investment in your future, even if you end up making less money out of it. Getting your first deal across the line is worth a lot to you especially if you're in it for the long play.

Think it through, make a plan that you know will work and go after it. There are plenty of deals out there, your first deal is just one of them.

Best of luck.

Ann Bellamy · Answer

A hard money loan costs less than a partner, @Robert Andrews .  Run the numbers to see.  And if you shop around, you may be able to do better than 12/2.  The key is to find someone reputable, don't get hung up on the interest rate, which is important, but can be less important than the terms for a short term deal.  Hard money lenders as a group have poor reputations, but you can find a few of us who people trust.    You can ask around at your local investor group, get one with good recommendations, that is key.

Keep in mind that conventional residential lenders are not interested in short term flip loans, for reasons that Brie mentioned as well as not making any money off a short term loan at lower interest rates.

As Karen mentioned, you might want to consider selling this deal at an investor group if there is enough room in the deal.  You just missed EasternMass REIA but I certainly welcome you to Black Diamond to promote your deal on the 27th.  @Mike LaCava and @John Fossetti run one in Plymouth, check with them also.

Brie Schmidt · Answer

Robert Anderson it sounds like DTI is the hurdle you are facing with the banks.  If so, there are set maximums that freddie/fannie backed loans can have and without the loss from your rental and without your wife's income it may be hard.  The other issue you might have is telling them it is a flip.  There is something called EPO (early pay off) that reduces or eliminates the amount the bank gets paid in commission if you refi or sell in a certain time period (usually 6 months)

The other options are a HML or even an equity partner where they give you the funds and you split profits 50/50.  Try going to your local REIA and ask around.

Jon Holdman · Answer

30 year conventional financing is not the property route for a fix and flip.  Buy and hold, yes.  But for a fix and flip you need a construction loan.  Construction loans are not easy to get and few banks offer them.  Most fix and flippers use their own cash, hard money, or money partners.

Hard money may be a better choice.  HMLs care more about the deal the your personal situation.  Your credit seems OK and you have cash.  For the right deal (which you've not described) you should be able to get HML financing.

The rate and points you're being quoted are actually pretty good.

Hard money is still a loan, so you would write offers as financed.   Not cash.

You've said nothing about your deal.  Describe what sort of deal you're trying to do.  I gather you're trying to borrow about $125K.  So, I assume your purchase plus rehab is about $125K and the ARV for the property is about $175K.  Sound about right?  With $70K of your own cash, that should be a very financeable deal.

Taking on a money partner is usually MORE expensive than hard money, so I can't recommend that route in your situation.  Where you might want help is in actually choosing the deal and doing the rehab.  New fix and flippers often don't realize the full costs, so they think they have a deal when they don't.  And they underestimate rehab costs.

You sound like you're planning to do the work yourself.  That's fine for paint and minor stuff.  But if you're doing electrical, plumbing or mechanical, you need permits and that usually requires licensed subcontractors.  Might also require using a licensed general contractors.

Jeff Rabinowitz · Answer

You don't state how much you wish to borrow or an details of your flip. You do state it will cost ~$10K to borrow the funds from the hard money lender. That may seem expensive but if you have a great deal and clear $50K on it you may be glad you did it. What if you clear $80K? You have to decide what a reasonable return is but if you need the funds to do the deal you will have to pay for them. Will you be better off if you do the deal or not?It will be more expensive and more difficult to borrow because of your inexperience. The lender will likely have more to lose on the deal than you. They will analyze the deal before making any loan. If your plan is not sound or there is not enough equity in the deal they will not lend. Frankly, it sounds like you may be better off having a relationship with an experienced investor and your lender may be that person.

Karen Rittenhouse · Answer

Robert:

Look for investors at your local real estate investor association meetings (REIAs) who are willing to fund a good deal. The money you can get, the cost of the money, and the amount of profit you'll share on the back end will all depend upon your experience. Since this is your first fix and flip, you should expect to pay more for money which means you need to be sure you don't over pay for your purchase.

Traditional lenders are not the best source for this type of money as they have no idea what you'll end up doing to/with the property so the risk to them is too high. Private money is what you should be seeking.

Since this is your first deal, going it on your own may not be the best solution for you anyway. One deal gone wrong can totally wipe you out and take you out of the game. Another solution is to find and negotiate the deal, then take it to your local investor groups and sell the deal to someone there. Even if you only make $2000-$5000 for it, you begin to build experience and credibility. You can, perhaps, help with the renovation to receive some of the profit. That way, you have someone guiding and teaching as you learn and someone to share the risk.

Judging by all the inexperience in your question, I recommend you do not do this on your own. REIA meetings and local landlord association meetings are great places to meet others who are doing exactly what you want to do. Following them will save you a lot of mis-steps.

Account Closed · Answer

You may be able to find a small local bank who will be willing to work with you, but it is almost impossible to find one who will finance the purchase and renovation cost of a property these days. Your best bet may be to purchase the home with a conventional loan and use your cash to do the renovation. The hard money route is also viable, but be careful. As you have seen, it is very expensive.

Derek T. · Answer

Work the hml numbers into your offer/deal and it won't be much of a problem.   You have the reserves necessary so calculate the $10k for the hml into your offer and leverage yourself that way.  You can also find an equity partner but if it were me I would be leery about putting up the money with a novice investor who I don't know if I were the partner. HML may be your best option and you are getting good rates for a hml.   You won't be able to say it's cash but most seasoned Realtors and asset managers know about hml and the way it works so it won't be a major draw back (although cash is always better).

Account Closed · Answer

Talk to some small local banks that do commercial loans, and as someone mentioned before ask for a product like a construction loan. This is the sort of product where you can start to find financing that takes into account both purchase price and rehab costs.

Charlie Claxton · Answer

I couldn't agree more with David. Getting that first deal across the finish line is more important than a higher profit margin. We work with partners a lot of the time; this means less capital outlay for both parties, and a since of community while working through the project. I would highly recommend partners.

I Can't get financing for a flip. Great credit, great down payment. Any ideas?

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