All Forum Posts by: Gus Muller

Hello BP community. Our company True Neighbor is gaining traction for scaling fix and flips. We completed 3 in 2019, 9 in 2020, and we are set to complete 10 already this year by April/May. 

We currently have $3MM in bank funding in two $1.5MM pre-authorized lines of credit for the purchases. Our banks will fund 75% of the purchase price and 75% of the rehab costs. We have used these lines of credit for about a year and they have been going well. Interest only and rate is under 5%.

So far, we've been personally funding the 25% down payments plus holding costs for every project, and have relied on private money for times when we are running cash tight. We have been paying a flat 10% rate on these loans and turnaround has been 4-6 months (the time it usually takes to acquire, rehab, and resell the properties).

Our accountant thinks this is way too much to pay, and is suggesting we try and source private money with a longer term so we can put that money to work multiple times. But we don't want to borrow too much money and end up with a surplus that doesn't get used and just costs us interest.

We hired a CFO consulting company that built us out a projections model, indicating the times in 2021 that we will need more funding based on our goal of 24+ this year.

Does anyone have suggestions or experience in structuring some private money filling in the 25% gap in our existing bank funding? I know it is all negotiable. We've been asked how to collateralize the private loans. We have brought private money in on the beginning of the deals by having them put down the 25% and putting them in 2nd lien position, which has worked. But if we are looking for investors to loan $100K+ this isn't feasible.

Our goal for this year is 24+ completed and closed out flips which we are very on track to complete. And we would like to scale to 50+ in 2022, and 100+ in 2023.

I am getting to the point that I feel we can stop using our own personal capital, and have gained enough trust from investors that they are asking to jump in. I need help structuring this out. If anyone has direct experience with this type of growth and situation, please reach out! THANK YOU!!!

Good morning BP members. I'd like to see what other flip investors think about profit margins when doing 20+ deals a year. We are on track to have completed 14 fix and flips in 2020. I've passed on some thin deals, and in hindsight, should we have pursued these?

We've never lost money on a deal, and maybe I need to get that out of my head. We have the staff and experience in place to start taking a little bit more risk. For the 14 properties, we've made between $30K-$40K per deal averaged out, after expenses. This is where we are comfortable. But, I do know we've lost offer contracts to other home investors, wholesale deals, and leads from other real estate agents. These deals have had profit margins under $30K, usually under $20K which I consider thin as these are a few price reductions to a break even point. 

One particular deal recently is a turn key condo with an ARV of around $240K. We could buy it direct from seller at $201K. But factor in the light rehab of carpet, paint, appliances and then calculate the holding costs, $400/month HOA, and real estate sales commissions, and that deal falls well under a $20K profit. It would also tie up some cash, and condo's take a bit longer to sell.

I try to think of scaling our flipping in terms of a baseball game as discussed many times from other investors and on a ton of the podcasts. Bunts, singles, doubles, triples, home runs, grand slams all equate to a win. We have yet to completely strike out, but it is probably bound to happen.

We also take a general approach as recommended by @Ryan Pineda @ryanpinedashow of a 10% minimum profit of the end sales price. So if we flip a property and list it on the MLS at $250K, we should see at least a $25K profit after expenses.

I've had some issues with wholesalers in my market trying to bring me deals. I always let them know we are looking for property with an $80K-$100K spread between purchase and sales price so that we have enough room in our budget for the rehab, holding costs, sales costs, etc. Most of the wholesalers say this isn't possible in our "market". But the deals that we get direct from seller do have these margins. The problem is, we can't find enough of them. And most of the "wholesale" deals in our market are just slightly better than what can be found on the MLS, with more hassles. These "wholesale" deals are usually the stuff that other flippers know is too thin, too much work for them to pursue, so they usually shed these off to the less experienced investors excited to get an "off market" deal.

Should we start taking on these thinner deals and hope for the best? Or would this tie up too much time for not enough profit?

Thanks BP!!!

@Aubrey Maldonado thanks for the response! Yes the 5 year terms certainly has me twitchy. But we do need some growth space. This is a tough call for sure. We can sublet part or all of the space if we get in too deep as a "worst case scenario". I'll check in with our commercial agent and make sure this is an option. I think we could get $400-$500/month per individual office if needed.

I've tried to justify the new office by looking at the difference in what we are currently paying for our small office. The new office will be around $2,500/month more X 12 = $30K/year which is basically one flips profits. Can we do just one more to cover it? I believe we can.

With a reasonable amount of staff on payroll, my hope is that we will save a lot of cash increasing efficiency by having a home base for operations. Fewer phone calls, fewer text message, fewer trips to the various home stores and to my garage. And I plan to train our current staff on deal analysis and deal finding so that they can also contribute and learn that side of the business! 

Our company has outgrown our small single room office space (2 years there currently) and we are considering leasing a space with a 5 year term. I have concerns with COVID as I believe the commercial market will soften. I don't really want to buy a commercial space right now either (too much cash down, responsibility, build out, etc). We can't continue to operate and keep on pace for our growth out of the small office and my garage.

The leasing option we have on the table is a premium central location and should be large enough to expand into for future needs. It has 5 offices, conference room, reception area, center "war room", bathroom, small kitchen, total of 1,964 sqft. Plus an additional 268 sqft heated shop space for building materials and tool storage with overhead door. No build out needed, but we will have to furnish. It really is perfect, and expensive ($3,100/month+internet/utilities). Our current office is around $1,100/month.

We have purchased and rehabbed 11 properties this year with an average of around $45K/flip. We have also expanded into the realty side of things for the leads that we can't make a deal on, now offering full service MLS listings through our brokerage. Our plan is to scale the flipping side of things to 24+ houses in 2021, along with snagging public MLS listings along the way.

I am scared of the 5 year lease term. We can sublet in a worst case scenario, and the company that handles this commercial property has a lot of options to trade-up if more space is needed after we meet the 3 year threshold. We haven't been able to find any reasonable and turn-key space that will consider anything less than a 3 year term, and we don't have the time to build out as the leads and volume of what we can buy are stacking up fast and our main focus needs to be on producing income.

Our staff currently consists of 7, some full time some part time (myself, transaction coordinator, office manager, project manager, business development, general laborer, and one real estate agent).

Should we put on our big boy pants? I can't imagine we won't have a better experience in the new space, and close many more flips. We need the organizational space, and I think it would greatly increase company morale, accountability, efficiency, lead generation, networking, etc. We can afford it.

If anyone has some advice, or possibly knows anyone who could mentor me through this I would greatly appreciate it. Thanks!

Gus Muller

@Martin Lindsay thanks for the comments! Yes we've considered "wholesaling" out some of the leads. However, we've been buying these homes by building rapport with sellers and letting them know we intend to rehab the properties, contribute to the neighborhoods, etc. We've beaten out offers from the national home buying chains by having a local and trusted revitalization company. Our goal is more of a long term, relationship building with sellers, doing right for the neighbors/buyers of our rehabs approach. We could move property faster with wholesaling out our deals, but the story ends there. Putting in the work is harder, but worth it in the end.

 If we got in a huge bind, I think we'd partner with a reputable rehabber to complete the projects. A few of our deals have been really profitable that we initially thought we should wholesale out!!!

Greetings members. Ever hear, "Be careful what you wish for, because you just might get it"?

I've been flipping houses since 2010, usually 1 or 2 at a time. I decided to build a trustworthy branded business as we've always provided quality finished products, contributing to the neighborhoods we serve.

We are now buying all of our houses off market and direct from sellers through various forms of (expensive) advertising (Google AdWords, radio spots) and are starting to get direct referrals from previous happy home sellers.

Now that we are currently managing 7 rehabs we've faced a ton of challenges. Most of the pieces are in place for staffing (myself, my wife and transaction coordinator, office assistant, 2 project managers, 2 licensed Realtors, and handymen/subcontractors). 

Leads were coming in really fast, so I put everything under contract that I thought was profitable and decided it was worth the risk. I wanted the data and I wanted to push the business and our team to the limits. I grossly underestimated the amount of liquid cash this was going to take, and the big challenge is finishing the houses, finding a buyer, and then waiting on inspections/appraisals/loan funding. Total turnaround time on most of our rehabs is 3-6 weeks start to finish. The hard part though is that we don't get paid until it sells to the end buyer, so the total process is usually 3-4 months.

We are going to start pre-listing the cleaner rehabs to try and line up a buyer during the remodeling, as our market is very hot still and competitive. Planning on allowing buyers to make some of the choices for flooring and finishes. This should in theory speed the process up.

For funding, we currently have a $1.5MM facility line of credit and our bank will fund 75% of the purchase price with only a drive by evaluation (no appraisal or interior entry). This line can be increased up to $40MM over time. We use cash and private money to fund the 25% down, rehab costs, and holding costs. So far this is working and we are looking into other funding options. We've considered funding the remaining 25% down with private money to loosen up our cash flow restraints, but that is spendy.

I am having a hard time juggling the numbers around. We are buying so many properties that even though we "profit" when they sell, that profit just goes immediately back out to purchases, rehab, holding costs, advertising, growth, etc. If we just stopped right now, we would see the results, but this is just not possible and we have no intentions of slowing down. Hoping the market holds, but if we run into issues, we can always keep what is on the books and rent as most of our purchases meet or exceed the 1% rule. We just prefer to sell and cash out versus rent.

If anyone else out there has had a similar experience, let me know how it went, what to watch out for, and possibly how you were able to push forward with the crazy numbers game. 

Investment Info:

Single-family residence fix & flip investment.

Purchase price: $199,000
Cash invested: $65,000
Sale price: $342,000

Fix and Flip #15. First purchase from a wholesaler who charged a $9K assignment fee. Home was in very rough shape and had been neglected for 20+ years, but did have a nice kitchen and main floor bathroom, large lot, and amazing original woodwork. Total project time 6 weeks purchase to listing. The neighbors were thrilled to have the worst house on the block become a shining gem!

What made you interested in investing in this type of deal?

This deal had a great lot, location, and potential. It was a ton of work as the home had been neglected for 20+ years. It did have a nice kitchen and main floor bathroom, but needed a roof with decking, garage siding, full interior paint, upper bath light remodel, basement concrete, AC unit, etc.

How did you find this deal and how did you negotiate it?

Networked with a local wholesaler who brought it to me. Not much room for negotiations as sellers had a mortgage to payoff, and they left the closing table with a check for $29.

How did you finance this deal?

Personal cash/HELOC

How did you add value to the deal?

Full rehab

What was the outcome?

Project took a lot longer than expected and cost more than anticipated, but was still a great and rewarding revitalization.

@Naqib Matin it is pending sale at $315k full asking price with no seller concessions.

Investment Info:

Single-family residence fix & flip investment.

Purchase price: $210,000
Cash invested: $40,000

Fix and Flip #14. Purchased off market and direct from seller. This was a referral from a previous client that sold us her home. It took a lot of appointments with the seller and building trust for her to sign with us. Seller lived in the home for 40 years. Great location and the main floor bathroom was already remodeled. We were able to complete the project quickly in about 6 weeks, and it sold to the first person that walked through with a closing date coming up of 5/29/2020.

What made you interested in investing in this type of deal?

The house was generally in great shape, but needed a new kitchen, paint, light fixtures, and a large list of required repairs from the City of St. Louis Park, MN.

How did you find this deal and how did you negotiate it?

This deal came to us a referral from a previous client that sold us her home. Negotiations were tough as seller was considering doing the work herself and listing the property. We were honest and transparent about what the costs would be for her to do the work, and it took multiple appointments and meeting her son-in-law to build enough rapport.

How did you finance this deal?

We used our new facility line of credit at our bank. They funded 75% of the deal with a 1% loan origination fee and low interest only payments. We kicked in 25% down and paid for the rehab work.

How did you add value to the deal?

New kitchen/appliances/kitchen floor, fresh paint throughout, ceiling and trim work repairs, replaced galvanized plumbing, new hot water heater, new garage door opener, new carpet, new interior door handles, hardwood floors buff and coated, and various city required repairs.

What was the outcome?

We were worried with the COVID issue coming to a peak mid way through rehab. Would there be buyers? We banked on providing a nice finished product at first time homebuyer pricing for the area. First available showing time was 2PM the day it listed, and an agent showed it at 2:15PM and had a full priced offer to us within a few hours.

Lessons learned? Challenges?

There were some bottlenecks in the rehab, one being the cleanout phase. Took a lot longer than expected and will probably hire a company to handle this in the future. Other bottlenecks included cabinet design/finalization and electrical permits due to COVID.

Investment Info:

Single-family residence fix & flip investment.

Purchase price: $260,000
Cash invested: $30,000
Sale price: $341,000

Investment #13 fix and flip. We thought about keeping this as a rental, but ended up selling it to pursue other projects.

What made you interested in investing in this type of deal?

The area was great and the house was large. We ended up doing a lighter rehab on it, and offered it at a more affordable price. We didn't want to do a full gut rehab as we felt this would be a little riskier given the busy road, no central AC, etc. We left the basement unfinished so that the new owners could make those decisions later.

How did you find this deal and how did you negotiate it?

This deal was listed on our local REIA website. We were the first to see it and offer.

How did you finance this deal?

Private money investor.

How did you add value to the deal?

Removed wall paneling, drop ceilings, and unnecessary soffits. Full interior paint and wall texturing. Painted cabinets. Replaced galvanized plumbing to kitchen. Fixed up the bathrooms, refinished hardwood flooring/stairs/etc. New light fixtures and receptacles throughout.

What was the outcome?

We did pretty well on the flip and turned a nice profit. The house was done start to finish in 6 weeks.

Lessons learned? Challenges?

Home was built in 1900 but sat on a block foundation. Turns out that it had been moved sometime in the 1950's. The paneling and drop ceilings hid some pretty extensive plaster damage, either from the house being moved or from years of settling. It ended up being a lot more work than anticipated. If we come across this scenario again, we will be more prepared!