Before you can take out a loan, you need to find a property right? You might eye that up and coming downtown area, but so is everyone else and all those earnest offers are pushing up prices on even the most distressed properties.
To find the right sort of house to take out a loan on you might need to get creative. If you know a listing agent, for example, you might find a home that isn’t even listed yet, just a few blocks away from that highly competitive neighborhood going for around 75 thousand.
What a great price, so you should make an offer right away before the competition catches on?
If you’ve found a property you want to flip, and say its beyond reasonably priced should you go ahead and make an offer?
No matter how low the list price, don’t just make an offer. You first need to evaluate the sales price of properties that match your vision (comps you know?) to get a sense of how much money you could make in the end. Remember that property listed at 75, you find a property with a similar number of bedrooms, and it just sold for 250, 250-75= a decent profit. Make a full offer right?
Wrong, because you need to account for rehab costs.
Walk through the property with a contractor, “I think replacing those cabinets will cost 2 thousand, the sink 3,” Get an estimate for every feature you see that needs improvement. Say your contractor estimates the repairs at 145 and you know you’ll only qualify for 200 in financing, if you went ahead and took out a loan, and made that full offer at 75 you wouldn’t have had enough money to finish your project.
The maximum offer you could make on this deal would be 55 thousand if you use this formula:
• max loan amount-rehab costs= MAO so,
200 (max financing available)-145 (rehab costs)= 55 thousand.
Don’t put in an offer until you know MAO, no matter how low the list price is.
Fix and flip financing is short term, the loan is intended to be paid off in a few months and there’s usually a balloon payment at the end. Any delays that keep you from actually listing the property are a severe problem. So before taking out a loan, you need to have a schedule in place. Have a time and date for when work needs to be done on every feature you intend to upgrade.
For example, “that kitchen sink needs to go in by the third,” because that kitchen sink needs to be ordered five weeks in advance. If you don’t have a timeline, you could default waiting for the kitchen sink to arrive.
So heres three rules:
• Get creative when it comes to finding potential flips.
• Don’t put in an offer until you know your maximum allowable offer
• Have a time and date for every feature that needs to be repaired.
The first rule ensures your project is profitable, the second rule ensures you actually have enough money to complete your project and the last one ensures you will be able to pay back your loan before it comes due.
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis Dahlberg Broker/RI/CEO
NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave | Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.