Relationship with hard money lender first or find a deal first?

Question

New to navigating the world of flipping and I'm in an extremely hot buyer's market. On the retail side of things, everything is overpriced and still disappearing like ice in a desert (fitting, since I'm in Tucson).

However, I still believe there are deals out there for a first time flipper like me that's willing to take a relatively small profit on a flip project for the sake of better understanding the process.

What I'm struggling with is knowing what pieces of the puzzle need to be in place before which. Say I am able to identify a potential deal (drive by or craigslist ad, etc).

Do I run the best analysis I can on it and quickly shop local hard money lenders (I've got no private money connections or existing equity to work with)?

Or do I establish some relationships with hard money lenders first?

My worry is that if I don't have the proper pieces in place I will miss the small windows of opportunity that do present themselves.

Jeremy Holcomb · Answer

I wouldn’t count yourself out. The very first deal I ever had was funded 100% with closing cost included and I got 5K at closing through a HML. Now what you have to do is some legwork. Go find a deal that already produces income and is selling below market value. Usually you can find an older person who bought it way back when and isn’t sure of the value. Generally it’s a building that needs some updating and TLC. Make it a deal the HML absolutely can’t lose and you can get it done!

BTW my first deal went like this:

Sales Price $45K

Appraised $90K

ARV $125K

Loaned $65K

Gross Rent $2200/mo

I had no job and no income when I bought this building! I found the HML cold calling every lender in NYC.

Where there is a will, there is a way! No matter the obstacles.

Greg Dickerson · Answer

Based on what you wrote it sounds like you do not have the capital to work with. If you can get a hard money lender to work with you they are going to require a down payment since you don’t have the experience and if you miss estimate or make any mistakes you will have to come out of pocket to finish the project.

Hard money is very expensive and can eat your profits up very quickly if you don’t know what you’re doing. It’s also best used for quick flips that you can get in and out of.

If you want to flip properties you still have to hunt for great deals like you would if you were wholesaling  so the best thing to do is get to know some cash buyers and flippers as they will teach you the market what to look for etc.

That being said it never hurts to talk to some hard money lender’s they can also tell you who the flippers are that are successful so if you do come across a deal you can’t pull off you can pass it along to another investor and make a fee.

Yes wholesaling can be a grind if you are trying to scale. However you can make a good bit of money wholesaling on the side if you know what you’re doing and how to find properties.

Kuba F. · Answer

There's no reason for you not to call several hard money lenders right now and learn about their programs and talk about different scenarios.  This will help you in your analysis, understanding what kind of deals you can get into in the first place.

Shawn Ward · Answer

@Gaege Root You should continue to analyze deal, but go ahead and get a relationship with at least 2-3 HMLs so you are pre-approved and then when it's time to put an offer in, you can get final terms from them and can move quickly.

All the best.

sjw

Joe Cassandra · Answer

@Gaege Root

Many say to find the deal first.

I had zero clue the prices so I bucked that, went ahead and contacted a bunch and all were happy to provide a quick estimate.

HML is really competitive now among each other so rates will be similar.

In ATL, normal rates are 2-4% origination, 10-14% interest.

Differences is all in the fees.

Only pay for an appraisal upfront. Anything else is a major red flag.

Also look for actual lenders NOT brokers. Brokers have higher fees plus their range of lending is "30k - $300MM". Real private money lenders have tighter mins and max. Some real ones might not finance repairs either.

Plus many real ones will tell you outright their lending their own money.

Investors know other investors.

Brokers know other brokers.

Greg Dickerson · Answer

@Gaege Root you should start with wholesaling first especially if you have no cash at all and no experience flipping. You still need some cash with hard money and those loans will wipe you out if you don’t know what you’re doing.

Develop relationships with cash buyers first. Often they will become your private lender down the road once you prove yourself.

Gaege Root · Answer

@Shawn Ward Yup, that seems like the smartest play here. Thanks so much for providing your input!

Kevin M Finley · Answer

Do both. Find a good local hard money lender and find deals concurrently. They will help answer any questions you have upfront and you will have a better understanding of the costs and fees when analyzing your deal. I have called and interviewed over 30 hard money lenders because it is a free resource adn I wanted a good idea of the national landscape.

A FAIR HML will check the following boxes:

-2-4 points.

-12-15% interest.

-$1500-2500 closing costs/ doc prep.

-No appraisal (BPO or similar).

-90% LTC, 70%ARV.

-$100-200 draw inspection fees.

Any numbers higher than those outlined should raise some eyebrows, and any lower than those should make you question their validity. Local is better. Many require appraisals, which is a hard no from me, but many borrowers have not had issues. In my market, appraisers are completely incapable of doing a "after renovation" appraisal, so it doesn't work out.

To be safe, you will want to make sure you have in liquid cash 10% down, closing costs, and around 20% of your total project budget. With the right 0% credit cards and contractor relationships you can get a job done in as few draws as possible and just pay down your card with the draw disbursement.

Gaege Root · Answer

@Jeremy Holcomb Thanks so much for chiming in. What an encouraging story!

@Joe Cassandra it seems that simply taking action one way or the other is what's important. In reality, I could do both in parallel. At the worst, if/when I do find a deal and I'm somehow not in a position to purchase it myself I could certainly find someone else that would benefit from it.

Cheers!

Gaege Root · Answer

@Greg Dickerson you do make a good point, establishing the skills and channels necessary to find deals will be valuable regardless of whether I'm wholesaling or flipping.

I will explore that option a bit more and continue networking and learning along the way. Thanks for chiming in!

Relationship with hard money lender first or find a deal first?

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