Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
I wanted to ask another question regarding the financing, since that seems to be a stumbling block for many on rehabs and flips, unless you have your own cash. Please select from the following list. We have to have a sample term, so for this exercise, it is 12 months or less.
A. I won't pay over 10% interset and no points
B. I'd pay up to 15% interest and no points
C. I'd pay up to 15% interest and up to 5 points
D. I'd pay 15-20% interest and up to 5 points
E. I want to pay no interest and share profits at some %.
F. If I plan to make enough on deal, there is no limit to interest %
After I receive enough replies, I'll share with some thoughts from personal experiences. It might prove helpful to you in your business. Thanks again for your replies. Rich
p.s. I think it will be interesting to all , what the differences are and ...........(my teaser)
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
16y
Hi, I feel like I am expected to reply to this based on another recent post concening interest rates....
Some of us may be restricted by state usury laws on mortgages secured by residential properties. So, from that respect, the answer is 10% and no points, which is the limit in Missouri.
To circumvent these issues, a joint venture approach is necessary. I think each project is unique and any split between partners should be established by contributions.
I have been a party to many of these arrangements, on both sides of the ledger. I think it's human nature for one to feel as if they contirbuted more in effort, time, talents or money than the others involved, I have seen and been involved in deals where all have said that there was equity in the arrangement, but it was obvious that at times there were felling of inequities, especially by those contributing labor and/or securing the deal.
I guess that I have been guilty as well as the funding partner of saying in essence, "without me, you have no deal". But I have never demanded the lion's share as I realized that without them, I don't have a deal either. I think those funding such transactions are generally a little to proud of their contribution, IMO. So, with that in mind, I approached my participation on two fronts.
I was generally in a management position of the transaction.Specifically I usually had to draft documents, arrange financing at the end of the project if necessary, perform construction management and disbursement activities and arrange settlements. These are all functions that would be taken on by agebnts, title companies and even attorneys (since I was a party to the contract). I would arrive at a flat fee similar to what others would have been paid to accomplish the same or similar duties. In some transactions, such as commercial deals, my handholding was required over the term of the transaction, such as for three years. But what was asked here is for no longer than one year. Regardless of the term, the ongoing participation required was assessed. That's my sweat in the deal. I could write a book on this aspect, but I'll stop, you get the idea.
As to writing a check or signing my name, I required a fair rate, assessed by my risks (and frankly, few individual investors can accomplish that in a reasonable assessment) and then required an interest return over the cost of money tha reflect that risk. Rarely was it over ten per cent over the term and brought back as a per centage or expected percentage of the profits. At times it was structured as a loan to the JV and the balance if any was added to the approach mentioned above.
Some deals ended up being 20% to the money guy and 80% the other way, to some 50/50 deals. So to give a percentage of the take is rather impossible without knowing the deal and the risks involved. Hopee this helps you with your analysis Rich! Bill.
Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
16y
I need some more replies, but this is going the way I thought. Too small of a cross section so far. Please feel free to join in with your answers. Rich
Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes
16y
I am in the F camp, as long as there is profit room in the deal the cost of the funds are negotiable. You did not mention: market rate. In California, there are quite a few lenders and they all charge within 3-4% of each other, so they have set the market price here.
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
16y
First, my answer: I'm willing to pay 1.5% in points upfront and 7% interest only. I have two lenders that provide financing like this or better (plus I can use my own cash, if necessary), so at this point, I wouldn't consider anything more.
Second, I could be wrong, but it sounds like you're looking to expand into the lending-for-rehabs business (and there's probably a ton of opportunity in that business!), and want to get an idea what typical rehabbers are willing to spend for financing...
If that's the case, here's something to consider:
In my experience, the less experience a rehabber has, the more he or she is willing to pay in loan fees (points and interest). But, this lack of experience generally translates to a much higher risk profile for that investor as well.
In other words, if you find someone willing to pay 5 points and 25% interest, it's probably a safe bet that it's a risky investment (not that it's necessarily a bad investment, just risky).
There are two reasons for this:
1. Experienced investors usually have enough financing options that they don't need to pay exorbitant rates. They've built relationships with lenders/partners and if they've been successful, the money has "found them."
2. In my experience, most investors who are willing to accept high interest rates (and lots of points) haven't done a very good job of analyzing how the deal will be affected by the high costs of financing, and when they're in the middle of the project and realize that they're spread much more thin than they thought, they start to cut corners. This snowballs into a situation where they turn out a product that doesn't sell quickly, and the high monthly debt service erodes their profit. Before they know it, they're upside down, and the lender has inherited a property, not a loan payoff.
So, while exorbitant rates might seem like the preferred way to go, you may find that targeting experienced flippers and receiving more modest returns (but still good returns) is actually a better business model than specifically targeting very high returns.
Again, just my assumption of what you're considering and my experience. Ignore all that if I'm off-base in my assumption...
Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
16y
J Scott- As you know, I've already done loans of this type in the past. Not neccessarily planning on doing it again. After a few more replies, I'll explain what my reasons are for the 2 posts. I explained that I would do this in my original post in this thread. I don't want to do that until there is a larger cross section, because as soon as I do the replies to that will get testy!
Thanks for sharing. Rich
Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
16y
Justin- you're good. You blew part of my info I was going to share at the end, but that is ok. No one else has caught that. For you, do it twice. One at 100% and another at 90%, all other terms the same. Rich
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
16y
Originally posted by Rich Weese:
Justin- you're good. You blew part of my info I was going to share at the end, but that is ok. No one else has caught that. For you, do it twice. One at 100% and another at 90%, all other terms the same. Rich
Rich,
Building on what Justin asked - he had my vote before your post :)
The "percentage of the deal" can be expressed as purchase price, or purchase price plus needed improvements, or even some percentage of market value after fix-up. Diferent lenders use different ways of doing that. Hopefully you'll be clear as to which you will be using in evaluating merits of a deal.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
16y
Rich, I think it's going great. Lenders are going to love it!
Just want everyone to know I missed a really good thread writing all the above comments, til Josh closed it! LOL
Rich, I don't know how it could get testy, I don't have a dog in this, but it's interesting to see how many are willing to go for higher costs instead of beating the bushes for cheaper money. Good thread Rich! Later, Bill
Real Estate Investor · ten mile, TN · Member since 2009 · 1k+ posts · 374 votes
16y
Definately A if I were to use financing because I can get a HELOC by living in the house during fixup time and only pay about 5% currently.
Otherwise E because I could do more deals and build the nestegg by charging the partner a percentage of the profit for the deals until I have enough that I can cash finance everything on my own.
Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
16y
My recap and results- This one didn't work real well. Only 5 posters posted on both Thread # 1 and Thread # 2. That is not enough for a cross section.
I had anticipated showing some correlation between the length of turnover, the success of flippers that thought a certain way and a couple other items. This just isn't a large enough cross section, but there were still a couple things learned.
3 of the respondents to both threads were also the 3 that had completed the most deals. There were only a couple items that they all had in common.
avg price of property(all at 100K)
same turnover time avg of 4 months
all pay int to lender & no shared equity
The amounts of interest flippers were willing to pay, ran the entire spectrum. Significant that the one that had the most flips would pay any amount, based on the potential in the deal.
Sorry this thread didn't have enough info to really mean anything! I still have my thoughts on this, remembering my very first teacher. He told me (35 years ago) that my goal should be to get 1 million dollars in debt! ( that was a lot of $$$ back then I asked why. He said with my brain and passion, that if I had a million dollars of OPM, i'd really be able to make a LOT of money. I fell into category F in the early beginning of my career as my book, threads and Meet the Investor section here on BP explain. I never wanted to be penney wise and pound foolish. When I made the most progress early on is when people would place their funds with me for investing.
As I said, my experiences in needing funds was a long time ago. I entered this thread to see what the current day was like as well as to compare thread 1&2. Sorry it didn't work and thanks to those that responded. Have a great weekend. I'll think about you while in the Caribe this next week. Rich, freezing in FL.