My first flip...Is this a good deal?

Question

Wish I had found this site months ago...so much to learn.  I'm serving as private lender (my first experience with this) and wonder if I'm getting a good rate/deal.

Not sure what info to provide, but here's the gist of the deal.

Purchase price of property $23,000. 3-bd 1-ba house (1,087 ss ft) built in 1959.
Renovations $7,000.  Which include new roof, paint and new gas lines.
Wholesale fee $1,500
Closing and Holding costs $1,000

Total cash in $32,500 (which I am supplying)

Estimated selling price $45,000

Total projected profit after 5% closing costs $10,250

of which I get
Investor Payout (5% for 6 months = 10% APR $1,250
Investor Projected Profit (20% profit split) $2,050

So my investment of $32,500 for six-months will return $3,300

Does the above seem fair?  I can't find any sites which dicuss what the interest rate would be for private lender real estate deals.

Thanks for your comments and advice.  Hopefully, I will learn and be able to help others in the future.

Ned Carey · Answer

That is an OK deal for you if the numbers are correct. Only $10,000 for a rehab is pretty slim in my eyes.

Your partner is doing a rehab for only $7,000 profit. I wouldn't even consider a deal like that. While on the surface that is his problem, if things get tough or expenses go high he may have little incentive to finish the deal. If he doesn't finish it doesn't matte what the numbers are.

If all goes well that is a 20% annualized return which is pretty good for a private lender. The concern here is simply what if things go wrong, you don't have much of a plan B.

I think it is common for private lenders to get 6-12% returns.  Hard money lenders, which are professional lenders at high rates for renovation loans, charge 12-15% and 2 to 5 points up front.

Manuel Acuna may consider himself an armature but he is right on.

Good Luck - Ned

Levi Gale · Answer

I'm not going to give a full reply as I haven't used private money yet. I am setting up private money now though. First problem is with your rehab numbers, I don't see any way to get a new roof, new paint, and new gas lines for 7k. That seems very low to me, and I would expect there to be more to the rehab as well given the year of the home.

Your terms with the borrower are really up to what you are comfortable with. Hard money here in Arizona is at 18% annually. Private money is what you can negotiate, and 10% seems about right. Your deal seems better to me with a 10% return annually, and a 20% profit share (unless i misread). If it wasn't for the rehab price I don't see a big problem with it.

My suggestion is check your numbers again, and triple check the rehab budget they gave you. This is such a low end deal, and low spread make sure you have everything figured out, because like Manuel said there is no room for error. Hopefully a lender can hop on and give you a better answer though.

Shawn H. · Answer

I would pass on this deal.  There isn't enough spread in this for any errors including the property taking too long to sell.

I am also very suspect of your estimated holding costs of only $1000 if your expectation is a six month hold.  You will have water, electricity, gas?, vacant property insurance (unless you're going to risk it), and pro-rated real estate taxes during the rehab.  Is any of that included in your rehab costs because $1000 holding cost doesn't cover all of that.

Also, are you planning to sell to an end buyer or an investor who doesn't want to do the rehab himself?  If you're looking at an end buyer, someone who can only afford $45,000 for a house is likely to need a lot of help to actually get in.  You may end up paying ALL of the closing costs just to get the deal done.  On houses this cheap, I estimate 10% closing costs.

I always back into the most I could pay for a house using my desired profit.  I'd want to make $15,000 minimum to split between you.  Any less and you have no room for error whatsoever.  Here are my numbers (not having seen the deal, obviously):

Sale Price: $45,000
Desired Profit: $15,000
Closing Costs (out): $4,500
Rehab Costs: $7000
Wholesale Fee: $1500
Closing & Holding (6 months): $3000

Max Purchase Price: $14,000 cash

Good luck with this one.  I just don't see the numbers.

If you still want to lend the money on this deal, I would go in strictly as a lender and not a "co-investor", and I'd get additional collateral because any mistakes by the guy who is actually doing to the work could cost this deal all of it's projected profit in a heartbeat.

Ron Druschen · Answer

Fred, The way you have described your participation appears to be one of a Joint Venture where you and the rehabber are sharing in the risk. This project is thin from a margin standpoint. I would rather suggest that the 'risk' be more on the shoulders of the rehabber in the deal, not you. Assuming that you are satified with the rate of return on your money, my recommendation would be that you become strictly a lender in first position on this deal. In that way if there are rehab cost overages (there always is) they are not borne on your shoulders. Also, by being in first position as a lender, your loan to after repair value ARV will be in the 72% range, which I would suggest be the absolute most you would lend against this deal.

Manuel A. · Answer

If I could make an inexperienced criticism I'd say this one and only criticism:

A $3.3K profit seems too small, this leave almost no room for error. Which I think there always is.

But that's just my amateur criticism...

Manuel

Fred Dray · Answer

Wow, thanks for all the great replies.  There is alot to think about.  We have not signed a contract yet...these are just the proposed terms.  That's why I'm asking for advice.

I am supplying the funds and he acquires the property, schedules renovations and sells the property.

The guy I'm working with is a licensed real estate agent working for Keller Williams.  I know him through a friend.  I think he is honest, but has not flipped many houses.  He is flipping in the Quad Cities area and has a crew there that performs renovations.  So, this is out-of-state for me and I'm financing based on his experience and knowledge.

Yes Ron, I think joint venture is the best term I could find on the net to describe this.  Thanks for the comment about me bearing the risk.  I wondered about that and how to structure the deal to share the risk.

Thanks for bringing up the rehab, Levi.  I wll have to double check.  He has a crew that has worked on several houses in that area.  I'll find out what repairs they performed on other units and what the costs were.

Good points, Ned.  My partner is just starting out in flipping and acquiring property.  I think at this point he's just trying to complete some transactions, so he has a track record to show other investors.  I know he's conducting seminars to raise money.  Most of his projects are for more expensive properties, this is in the range of what I can afford to lend.

Thanks so much for your advice/comments.  Now I have an idea of what to discuss when we sit down to write up the deal.  I'll keep everyone informed as to how this works out for me if I decide to put up the money.

Best of luck to all of you in your projects as well.

John Mireles · Answer

I'm not liking this deal. You're putting in all of the money - and thus taking all of the risk - and you're getting a 20% return. You're coming in as an equity partner, not a lender, so if the deal is unprofitable, you don't make a dime. If I were to partner with someone on a deal like this, I'd expect at least 50% of the profit plus interest.

That and I think your margin is too thin. Unless you've got a lot of experience in this business, I'll bet that your expenses are 50% to 100% higher than your original estimate. Optimism is your enemy here.

Michael Galloway · Answer

Fred Dray, i do not consider myself a private lender, however i borrow millions of dollars from lenders that are still in business and have weathered the real estate cyclical storm.

This is your 1st transaction and you are way too deep in this transaction. Your goal as an investor is to protect your money. you need to operate on LTV (loan to value) at most of 70% of the purchase price. Given your example you would lend a maximum amount of $16,100. of the purchase price. (23,000)

You want the rehabber to have skin in the game. This keeps them in the project. If you gave them a check for $7000 (for the rehab) What's to keep them from just walking away and never lifting  a hammer? they would. This amount is more than they will make in the end, so why do the work? ... Then your stuck with a house, and your not in the rehab business, your in the lending business, right?

Sean Brennan · Answer

That is over 20% annualized... pretty good.  I assume you didn't do any of the work, right?  If they defaulted on your 5% could you have taken the property?

I've seen hard money rates at 11% to  14%...  I think you did pretty good.  I am an amateur as well...

lets get some experienced people in here lol

My first flip...Is this a good deal?

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