HML as exit strategy in wholesaling
Residential Real Estate Agent · Somerville, MA · Member since 2009 · 195 posts · 32 votes
I've come to the conclusion that using hard money lenders as a backup exit strategy is the way to go for wholesale deals. What a confidence boost. You can look a troubled seller right in the eye and tell them without a doubt, "I will buy your property for this amount RIGHT NOW". Even if every investor in the state decides to shut their phones off for the next month, you'll be able to save a distressed seller from further ruin.
My question is, in the early going is it too risky to grab a hard money loan and attempt a rehab? I would hate to go forward with a HML and lose points, hurt my reputation, and burn a bridge. At what point is this alternate exit strategy worth exploring? I have 5 HML's lined up, but I'm a bit torn if it's worth the risk on my first couple deals...
What I understood from your original question is, "does it make sense to use a HML to go ahead and buy a property if you can't assign or double close within your "option period?" then, continue to try and wholesale it.
Simply put you would be buying the house then reselling it for the same price you were originally going to sell it for. That would still be considered wholesaling but your profit would shrink by however much your loan costs you upfront, on the end, and monthly. That wouldn't leave you with much or any profit unless you considered all of that going in.
As for what has already been discussed.
I agree that wholesaling, and rehabbing are both exit strategies.
Adding a few rehabs is a good idea when you are ready and able. You will probably need to have enough money to pay for the rehab. What you should do in the future is determine how long you can market a wholesale property before it becomes a rehab. Most likely it will be however long that assignment fee that you were planning on will last while you are making payments to your HML. You'll need to figure out at what point the wholesale property becomes a rehab. Account for the time that it is going to take to complete the rehab.
My plan consists of A, B, C, and D. I plan to wholesale every property (A), if I don't wholesale it then I rehab it to retail (B) if I can't retail it within 90 days then I carry the note (C) and if it doesn't sell within 60-90 days then I rent it. (D) {sometimes I just purchase to rent, rehab, or carry the note exclusively with no other plan. although I still try to wholesale them first}
When you have multiple exit strategies and backup plans you have to account for it up front. So, your purchase price would need to allow for you to make a profit even if you had to exercise plan D.
Your biggest goal is to keep all of your expenses under 15% of ARV and try to net 15% of ARV.
The expenses that you will need to consider are:
You buy a house at 65% of ARV ($65,000) - repairs ($15,000) - your assignment fee ($10,000). That puts your purchase price at $40,000.
HML charges 3 pts up front ($1,200) and 2 pts ($800) when you sell it amoritized for 30yrs at 12%. ($412/mo)
You figure that the rehab will take 60 days and it will take at least 90 days (plan for 120 days) to sell it. ($1,648)
Remember, the Realtor will charge you 4% (or more) to sell it and you may end up paying for the buyer's closing costs ($4,000+).
You still have to factor in other holding costs such as insurance, pro-rated taxes, your portion of closing costs, utilities, etc...
After 120 days on the market you will cancel or allow your contract with the realtor to expire and you won't have to pay commission. Keep in mind that your other expenses are ongoing.
After 90 days of marketing your property as OWC then you put a for rent sign in the yard.
This plan assumes that you are only trying to wholesale a property during your option period. If you try to wholesale it longer then you will need to consider additional holding costs; from the time you close on it until you decide to begin the rehab.
My goal is to never get past plan A (and haven't yet) so if you end up past plan A then you need to revise your property analysis.
For each property you can create a timeline to account for every step in your action plan.
Here is what I see...
Having plan B is great. Good job!
Your challenges if you end up buying a property will be to realistically estimate your repairs and their costs and then to get the property renovated in a timely manner and within your repair budget.
Can it be done... Yes!
The skills you will need include estimating repairs, choosing, hiring and managing contractors, and managing to your project to the draw schedule.
Best of luck!
I have virtually no capital to work with at this point, so I don't see it as a viable option. But I definitely want to be prepared to make that switch as soon as possible...
I may be missing something here, but the purchase with HML is an entrance strategy, what is the exit strategy?
If you are proposing to fix and sell retail, that would be plan A.
Since you mentioned all other investors turning off their phones to you, are you considering allowing the HML to foreclose and take the property as plan B?
I am not sure how many times you could do this and help people in the long run.
I'm a wholesaler full-time. Plan A is always to assign or double close any property I put under contract to my end buyers (investors). However, if I'm unable to unload the property, I plan to (eventually) partner with a GC and HML to rehab the property.
My business plan is to initially work wholesales full-time and then slowly integrate rehabs as my funds grow. I already have spoken to a couple GC's who work with investors full-time that are interested in a partnership down the line...
As a wholesaler I want to get to the point where I can put an offer on any property and know with complete certainty that I can make the property work in one way (wholesale) or another (rehab).
should work if your spread is good enough, hml have high fees points and rates, gotta make enough to cover these cost and still sell for a profit. find a HML with no pre payment penalties and one who will actually close/fund. everyone and there moms a HML till you need the $$$$
That is good. You had me confused by speaking of HML as an exit strategy. Possibly you just used the wrong term here. The exit strategy is how you are going to get rid of the property bought with any kind of funds (including HML).
Wholesaling is one exit strategy. Retailing is another. I would use this one as plan A as you would make the most by selling at or close to retail to anyone. Using a realtor and paying their commissions to sell quickly would net you less but could be a plan B
You may use your contractor, or other investors to sell to if A & B do not work in the time allotted by the HML timeline. This would net you even less as you have to allow them to also make a profit. These could be plans C and D.
The problem I see here is the lack of capital. Without capital, how are you going to make your monthly payments to the HML? Also, if you could not move a property quickly it may not be a good enough deal to begin with. I think it's great to be able to look someone in the eye, tell them your going to buy their home and then follow through and close on it yourself....BUT, at what point does a deal like that not make sense? Personally, I would question any deal that I could not sell quickly.
I'm just trying to be realistic here, so don't take my comments negatively. I just see some potentially devastating results because of the lack of capital. Another thing to consider is that a lot of HML's these days require some $ up front either from points charged for the loan or a down payment.
In my opinion, if a deal is marginal just use an Option Contract.
Jeff
Completely agree Jeff. I'm thinking long term here. For now I plan to stick to wholesaling only, but ultimately this is where I want to be with my business. Now figuring at what point I can make the transition to incorporate HML's into my business is what I'm trying to gauge here...
I hear you, I think I misunderstood your point with my last post. I'm not a rehabber but I would be most comfortable doing a rehab if I could afford to pay for it out of pocket if it came down to it. I would still use the HML for the whole project but having the reserve capital in the bank would make things sit a little easier when an unexpected problem or longer then expected holding period occurred.
In other words, I'm saying that if you had a home you bought for $50k that needed 20k worth of work, I would prefer to have the 20k in the bank but still borrow the full 70k from the HML. Make sense?
Jeff
Makes complete sense Jeff. Thanks for the clarification.
What I understood from your original question is, "does it make sense to use a HML to go ahead and buy a property if you can't assign or double close within your "option period?" then, continue to try and wholesale it.
Simply put you would be buying the house then reselling it for the same price you were originally going to sell it for. That would still be considered wholesaling but your profit would shrink by however much your loan costs you upfront, on the end, and monthly. That wouldn't leave you with much or any profit unless you considered all of that going in.
As for what has already been discussed.
I agree that wholesaling, and rehabbing are both exit strategies.
Adding a few rehabs is a good idea when you are ready and able. You will probably need to have enough money to pay for the rehab. What you should do in the future is determine how long you can market a wholesale property before it becomes a rehab. Most likely it will be however long that assignment fee that you were planning on will last while you are making payments to your HML. You'll need to figure out at what point the wholesale property becomes a rehab. Account for the time that it is going to take to complete the rehab.
My plan consists of A, B, C, and D. I plan to wholesale every property (A), if I don't wholesale it then I rehab it to retail (B) if I can't retail it within 90 days then I carry the note (C) and if it doesn't sell within 60-90 days then I rent it. (D) {sometimes I just purchase to rent, rehab, or carry the note exclusively with no other plan. although I still try to wholesale them first}
When you have multiple exit strategies and backup plans you have to account for it up front. So, your purchase price would need to allow for you to make a profit even if you had to exercise plan D.
Your biggest goal is to keep all of your expenses under 15% of ARV and try to net 15% of ARV.
The expenses that you will need to consider are:
You buy a house at 65% of ARV ($65,000) - repairs ($15,000) - your assignment fee ($10,000). That puts your purchase price at $40,000.
HML charges 3 pts up front ($1,200) and 2 pts ($800) when you sell it amoritized for 30yrs at 12%. ($412/mo)
You figure that the rehab will take 60 days and it will take at least 90 days (plan for 120 days) to sell it. ($1,648)
Remember, the Realtor will charge you 4% (or more) to sell it and you may end up paying for the buyer's closing costs ($4,000+).
You still have to factor in other holding costs such as insurance, pro-rated taxes, your portion of closing costs, utilities, etc...
After 120 days on the market you will cancel or allow your contract with the realtor to expire and you won't have to pay commission. Keep in mind that your other expenses are ongoing.
After 90 days of marketing your property as OWC then you put a for rent sign in the yard.
This plan assumes that you are only trying to wholesale a property during your option period. If you try to wholesale it longer then you will need to consider additional holding costs; from the time you close on it until you decide to begin the rehab.
My goal is to never get past plan A (and haven't yet) so if you end up past plan A then you need to revise your property analysis.
For each property you can create a timeline to account for every step in your action plan.
I love your method Chris. In my stumbling bumbling way this is what I was attempting to bring up initially. I'd be curious to know other members of BP's train of thought when it comes to their A, B, C, D, etc. exit strategies....
There are definitely benefits to wholesaling by purchasing a property then reselling it.
Mainly, if you know it's a good deal, then you can hold on to it until you get the price you are wanting for it without stressing out about having to back out of the deal. You will also be able to clean it up a bit and show your vacant property which is a lot easier then trying to show an occupied house that you haven't even closed on yet.
As I mentioned before, using an HML for this strategy may not work very well. Ideally, you will want to borrow money from your local banks at a much lower interest rate. If credit is the issue then improving that should be your first priority. There are credit specialists that can clean up your credit through the dispute process.
HML's can be used for wholesaling REO's, kind of like transactional funding. But you will need your end buyer in place.
The biggest danger in using an HML for wholesaling is that if you can't sell it they take the property and ruin your reputation.
Its not a good idea at all to rehab for your first deals. You should wholesale at least 3 -5 deals before you consider rehabbing.Its good to get the experience first.
Brian Haskins
Thanks for your thoughts Brian. I plan on working the wholesaling angle really hard and I don't want to get involved in rehabs until I have enough capital to cover all repair costs even if I use a HML. Might be more like 8-10 deals before I get there, but it's good to know where that fits into the big picture.
Hi, some good ideas and points here. One of the first things I consider when looking/considering a rehab, is timing in my local market. Where are you going to be after two months of rehab and three weeks or so in marketing? If you contract for the purchase of you rehab deal on Spetember 5th, you may not close before the first of Oct, rehab for 2 months puts you trying to market it just before Christmas, if that takes 30 days for the retail attempt, you're looking at the dead of winter and people here don't move alot in the snow! So, you'll likely be waiting the end of March before buyers begin looking again. As far as being in a financial position to do a deal, I think you need 6 months debt coverage and twice the estimated costs of the rehab in addition to any down payment required. In addition to that cash reserve, you should have a secondary source of funds, if nothing but an open credit card equal to the cost of the rehab and six months debt coverage. I know this sounds like alot of reserves, but when you consider finding that your rehab breaks open a wall and exposes old asbestos siding, that you need to replace a furnace and then it remains on the market for 90 days, you'll need more than you may have originally thought. Good Luck, Bill