Figuring your bottom line

[Jessica Martin]

So Im really working to find out about a few things with wholesaling and fix-n-flips.

My biggest hurdle right now is being afraid of paperwork without someone there to tell me if Im doing it right or wrong. Its such a scary concept to me since this is legal paperwork... what if I dont include something that should be included to protect myself, exc... Any tips/advice on paperwork process? 

Can someone maybe give me a break down of the PAPERWORK process of what happens on a wholesale deal from the time you put a house under contract to the point that you collect your wholesale profit? 

Now this may be a complete newbie question, but I want to make sure that I understand this correctly. On lenders interest fees for a fix and flip, say the interest rate is 15% and the loan amount is 100k(just to make it easy)... Lets say I borrow the money and have it out for 6 months... I would only pay $7500 in interest correct? Because 15% is annually and I only had the loan out 6 months... 

And Balloon only really means that I guarantee that if I still have the loan out at the end of 12 months, I will get the lender his money back, either by finding a different route for financing  or whatever I have to do to get his money back to him?

Also, Ive heard a few people say they take out a few extra thousand from their lenders to cover carrying cost throughout the rehab process. How is this done? Is it really "allowed" to be done?

Thank you 

[Jon Holdman]

The paperwork for a wholesale deal depends a lot on exactly how you structure the deal.  Lots of variations.

When you're quoted an interest rate its almost always an annual rate. With HML's, interest is almost always simple interest. So, yes, you would owe $7500 in interest on a $100K, 15% hard money loan that you had out for six months. Some lenders will want monthly payments, some will let you defer payments until you sell.

You will also typically have points.  Those are deducted up front.  So, if you lender charges you four points, you would actually only get $96K from that $100K loan. The interest is still calculated on $100K, since that's the amount you're borrowing.

A balloon payment means that at some point you have to pay off the remaining loan balance.  Hard money loans are almost always interest only, so the entire loan balance is due at some point.  Most other mortgages are amortized, so the payments are higher than an interest only loan.  The extra goes to pay down the principal.  So, the balance is always getting smaller.  But you can still have a balloon.  Very common in commercial loans where you might have a loan with a 20 year amortization period and a five year balloon.  The payment is computed as if they loan will be paid in 20 years, but after five, the entire remaining balance is due.

Many HMLs have minimum down payment requirements. Some don't. All have some LTV requriement, either based on the purchase price, maybe with rehab, or based on ARV. You're going to have to have a really, really good deal to get some cash from the lender out of the deal.

My rule of thumb is that if your HML will give you 70% of ARV with no minimum down, and the purchase plus rehab for your deal is right at 70% of ARV, then you will need about 15% of ARV of your own cash to complete the deal. Some at your purchase closing (points, inspections, appraisals, lender fees, title company fees, etc.) and some as you hold the property.