Analyzing a Flip That Has Multiple Costs

[Sheldon Alex]

Hey everyone. Here's a deal I'm going to break down pretty thoroughly on my process of evaluation. I got this deal from a connector within Gator. Before I looked at the deal, here's what I asked from him:

• The purchase and sale agreement
• Rehab breakdown documentation
• 2 HUD statements of previous deals
• Deal info (Property profile, funding, security, repayment plan, etc.)
• Title company involved in the transaction

What I also asked for was a term sheet from the hard money lender that was lending at first position. I wanted to get a breakdown of all of the costs associated with using them to fund the majority (90% LTC, 100% rehab) of this deal. The purchase price was $560,000, so I knew the costs would be high. 

The cost of points was $11,880, and the loan service and prorated interest rate fees equaled $6,126. Then the buyer was paying closing costs, which I estimated around $11,000. Then there's the $56,000 down payment from the borrower, thus signifying a pretty decent cash to close amount. 

How much was the HML charging in interest? They were charging 12.24%, bringing the simple interest amount to $5,148. As you can see from the images, the holding costs can add up tremendously. It can make or break a deal in some cases.

This project carried with it a estimated $97,000 rehab estimate as well; another huge cost. Then once sold, the listing agent would be getting their cut of $36,250. Lastly, there's the second position lender who would receive $26,200, but only if they accept the 20% flat rate. 

Now the borrower estimated a $925,000 ARV. So I put that theory to the test and pulled comps using Zillow. I searched for the most RECENTLY SOLD COMP within the SAME SUBDIVISION. There was a property that sold early October for $725,000. It had similar square footage in property size, similar square footage in lot size, was built 8 years apart, and was renovated.

Sadly, there was a $200,000 difference in their projected ARV and what I found. And they definitely needed that $200,000 for this renovation project, because as you can see, they and a lender who deployed the funds for this would likely be boarding a sinking ship.

Upon my discovery, I let the connector know that we wouldn't be able to lend on this opportunity.

Moral of the story: Go for deals with HIGH SPREADS.