Podcast Episode 13: “Happy Tale.”
Usually, the Tales from the Trenches podcast is about how people mess up when buying and selling real estate, showing what we can learn from their mistakes. But this Tale turned out just fine! It looks at things to consider when moving from a buy and hold strategy to a fix and flip strategy. Consider private financing if your bank doesn’t like your plan to fix and flip. Your ability to perform will produce private lending opportunities impossible to get in the public marketplace.
Download the audio file HERE.
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How to Make Money Quick in Real Estate:
Take the Time to Do It Right!
Two investors partnered up and thought they would like to try the ‘fix and flip’ strategy. It was their first step outside their previous portfolio of three conservative ‘buy and hold’ properties.
They were a little nervous about the usual things. Can we find something with enough hidden value? What about contractors? How do you find reliable tradespeople who will bid jobs at reasonable cost and finish on time? When do you start to market and should we do it on our own or use a realtor? How do we finance this? They did as much diligence as they could and started looking for properties.
They found a condo in a decent area in a decent building. The 20-year old unit was tired and dirty. Not one thing had ever been changed or painted by the previous owner. When viewing the unit, the owner’s fuzzball of a dog happily greeted them by running around the unit and showing them her favourite scratching places on the rugs and woodwork. This condominium unit did not show well, but our investors thought it had real potential. They went away, did some numbers and more diligence on this particular building. $20,000 worth of renovations would give them an estimated $40,000 profit.
Mortgages from Big Banks vs. Private Lenders
Before making an offer they had chatted to their banks about a mortgage to buy the property and do the fix ups. They got the usual answer of 80% of the lower of purchase price or appraised value. The bank didn’t want to talk too much about doing a loan based on the after repaired value with hold-backs until those repairs were done. In fact, the bank wasn’t too enthusiastic about the concept at all.
One of our investors ran into a close relative who was bubbling over about his bank offering a line of credit at an introductory rate of prime minus one. The trick was that the line of credit had to be borrowed immediately and not repaid for at least three months. “Really,” says our investor, “I can help you with this problem!”
They quickly came to an arrangement for a loan big enough to buy the unit and pay for the renovations, essentially 120% financing. Since they expected the whole process to take about four months anyway, they agreed with the relative they had to pay four months worth of interest. That gave the relative some certainty about how much money he was going to make and satisfied the bank’s minimum three-month borrowing requirement. The loan was set up as a 1st mortgage at 75% LTV at 7% and a second mortgage at 10% for the balance.
Our investors paid legal fees but no other lender fees. Anyone who has borrowed private money knows this is an excellent deal. But our investors are cautious types, so they chatted with their financial advisor to see what he thought of the deal. Here’s what the financial advisor said.
“This looks good; you guys have a track record in property ownership. If this renovation works out, tell me about the next one and I will provide the financing. If that second one works out, I will seriously consider advising my client base that they can invest with you guys and make some money.”
With financing in place the offer was made, accepted, and the renovation progressed smoothly.
Lessons Learned:
- Renovation deals are still out there.
- Mainline lenders are still cautious.
- Inexpensive private money is available, just ask.
Contact Barry McGuire now. Alberta real estate needs an Alberta lawyer.
“men’s blue jumpsuit” image via Peakpx used under a Creative Commons Public Domain Dedication.