Found deal (I think), now the $$ finds me? 1st "Fast" Flip. HELP!

[Jack Tucker]

Existing rental property rehab, buy-and-hold guy wanting to get into flipping. I'm an BP podcast graduate. I keep hearing the advice to focus on finding the good deals and then the money will come.

Question 1: Please verify that the deal is as good as this rookie thinks.

Question 2: Please advise how to best finance this deal. HML? etc? I'm willing to put all of my other properties on the market tomorrow to try to liberate cash, although I'd rather not sell unless necessary.

Question 3: Is it better to Wholesale this deal?

Bank REO foreclosed at loan value of $229k in April 2013. Just dramatically dropped their asking price. 4 bedroom/4.5 bath 3300+ sqft. Great bones. Recent addition. LOCATION: Local population approx 175k in university town. Top public school system in Georgia. Close to my home address and I am familiar with the RE in this area.

My planned offer price with favorable verbal feedback from the bank is $100k. Gets it off their books before 2014. Itemized repairs $18k. Doubled for factor of safety $35k. Conservative ARV $250+k. Very Quick-Sale Price Point of $195k. (Most in county sell $300+k)

Primary Exit Strategy is price low $195k to liquidate within 90 days max (Spring 2014) with nice margin. Alternative ES is to get one of my other multifam properties sold with strong equity in parallel to pay off financing. I don't like debt but don't want to miss this deal if it's as good as I think.

Entered holding costs, sales costs, double budget, low ARV etc in BP calculator and still beating the 70% rule. Time is of the essence. Meeting my subs and realtor on site tomorrow to firm up repair and ARV projections. Ready to pull trigger if real and can line up the funds, including construction.

Please advise!

[Bill Exeter]

Hi Jack, I have copied a brief article that I wrote on holding periods, so hope this helps:

Holding Guidelines for 1031 Exchange Properties

While the Department of the Treasury Regulations and numerous rulings make it very clear that you must have the intent to hold your 1031 Exchange property for rental, investment or use in your trade or business, they fail to define exactly how long or over what period of time you need to hold your relinquished properties or replacement properties in order to qualify for a 1031 Exchange pursuant to Section 1031 of the Internal Revenue Code or Section 1.1031 of the Treasury Regulations.

Property Purchased Just Prior to 1031 Exchange

The Internal Revenue Service has routinely taken the position if you purchased your relinquished property just prior to your 1031 Exchange transaction that you have actually purchased and are holding the property for sale (inventory) rather than holding it for rental or investment. Furthermore, the Internal Revenue Service has also taken the position that if the replacement property is sold immediately after your 1031 Exchange transaction is completed then it was not held for a sufficient period of time to qualify for 1031 Exchange treatment.

Little Definitive Authority on Holding Period

While there is no actual holding rules or regulations and very little definitive authority on a holding period, in one private letter ruling the Internal Revenue Service has stated that a minimum holding period of two (2) years would be sufficient to meet the Qualified Use Test, and a number of court decisions have also taken the same position (although they have been somewhat more liberal than the Department of the Treasury and the Internal Revenue Service).

Intent to Hold is Important Factor

The period of time that you hold title to the property, although important, is not the only factor the Internal Revenue Service will use to determine whether you had the intent to hold the property for investment and therefore qualify for 1031 Exchange treatment. The real issue is whether you can prove that you had the intent to hold the property for rental, investment or use in your business.

The easiest way to demonstrate your intent to hold a property for investment or use in your business is to do just that. You should actually hold the property for rental, investment or for use in your trade or business for a sufficient period of time. The longer you hold the property for investment purposes the stronger your case will be if the Internal Revenue Service questions the sufficiency of your intent.

Advisors Recommend Holding the Property for 12 Months or More

Tax advisors frequently recommend that you hold the subject property for at least one (1) year to prove your intent to hold the property for investment. Holding the property for at least one year means that you will straddle two income tax periods and give you two income tax returns listing rental income, expenses and depreciation, all of which help to provide you with a solid argument that you did have the intent to hold the property for rental, investment or use in your trade or business.

In addition, the United States Congress at one time considered a minimum holding requirement of 12 months for both relinquished and replacement properties. While the requirement was never enacted by Congress, it does provide a good indication of what sort of holding period Congress would consider sufficient to meet 1031 Exchange requirements.