3 Pts Off The Top Reasonable For Financing a Flip?

Question

Hi all. I'm getting ready to bid on a foreclosure. This will be my first flip. I am working with a broker/builder who has put together an 'at cost' rehab estimate which I feel might be a tad high for a basic paint/ floorcoverings/ windows project (he is not doing the work). He will also list the home once done (I assume he will keep only 2% of the 6% listing). I am financing the purchase, rehab, and carry. Is it reasonable to ask for 3 pts off the top before splitting the rest of net proceeds 50/50? It looks like this: $22K purchase. $18K rehab estimate. $5K closings and carry. ARV is $70K per partner.

Am I simply being to cheap? My concern is that we are running into the cold months and ARV turns out to be $55-65K rather than his $70K estimate. I want to make sure my risk is taken into consideration and I net as close to $10K as I can. Thanks for reading.

Paul Jamgotch · Answer

Bill Gulley

Thank  you for the replies,  Both insightful. I am funding the purchase, rehab, & carry with my cash. I'll hold the title/deed until sale.

The 2% I mentioned was from his firms 3% cut.  As a broker working out of another's' office, I am assuming his take is fairly high...might even be the entire 3% I guess. Not a lot, either way.

His fee is nothing more than 1/2 the net profits of the project. I'll forego the points and hope ultimate sale/expenses are in line with our expectations.

Paul Jamgotch · Answer

@Roy N.

Correct, Roy. He'll keep the 2-3% commission on selling price. He's providing his contacts and over-sight of the project. I have a 8am-5pm job so it helps a ton to use his contacts, have his over-sight, and general rehab/flip knowledge. I am in the midst of a career transformation so I will likely be able to do this on my own in the future.  Right now I don't have the contacts to pull this off myself... believe me, I've looked. I'm happy to discuss any possibilities with Grand Rapids area rehabbers.

Roy N. · Answer

@Paul Jamgotch

Above you indicated this other broker/builder is not performing the rehab work on the property.   You are funding the entire project.  I presume he is selling the house in the end {for which he will get commission}.

What else is he contributing in exchange for 50% of the net profit?  Did I misread something?

Bill Gulley · Answer

Define, "I'm financing" you are getting a loan or you are providing a loan?

3 points? Do you mean a 53/47 split? Or 3 pts on a loan.

Lots of guidelines on charging points, from it not being lawful by private parties or sellers to usury issues.

Realtors usually split commissions, at 6% he'd take 3%, so is there and addition 2%?

You should be familiar with material costs, suppliers and time required for a job so you can judge any bid. If he isn't doing the work it's all subed out, what is his fee for overseeing it, 2%? :)

Darrell Shepherd · Answer

There isnt much of a guideline to go by on this.  A lot depends on how much work you are going to put into the thing.  I pay my lender 2 pts and 12% because its cheaper than splitting the deal.  On your first one, I'd be more worried about protecting capital and learning than worrying about squeaking out another few hundred bucks.  Make sure your note and security deed are in place and you have a written partnership/operating agreement and watch how you hold title.  I'd structure and interest rate on the money, even if its low, then split the profit.  You also have to watch the expenses, pretty easy for them to buy tools and supplies for other jobs on your dime if you aren't paying attention.

Paul Jamgotch · Answer

The home is 1700 sq ft. It will not require furnace, counters, or cabinets to be replaced.