09 Sep Deeper Into the “Art of the Flip”: Understanding the “Financing” Pillar
Deeper Into the “Art of the Flip”:
Understanding the “Financing” Pillar
In continuing with our blog series about house flipping, let’s now take a closer look at the second “pillar” of the process, which is financing. As we covered in the first article regarding the overall basics of flipping, the term “financing” is merely a fancy way of describing the capital (or money) you come up with to pay for the property you wish to flip.
Here’s a brief recap of what we discussed with regard to this aspect in that first blog:
• Two big myths surrounding financing for flipping have been that it either needs to be done through a bank, or a flipper must use their own cash to buy the property; neither of these are true, as bank financing is only one way to obtain money for a property (and definitely not the first one we’d recommend)…and you’re certainly not limited to tapping into your own funds, either.
• A popular way to finance a property when flipping has been to use “private money” from a lender who is seeking an alternative way to invest their money (as compared to via the stock market or low-yield savings accounts/CDs). Since flipping houses can often provide individuals with an annualized return of eight- to 12-percent on their capital, this is significantly better than the 0.05-percent return that most banks provide.
• Similar to private money is what we call “hard money,” which is more “institutionalized” compared to private, and you may need to qualify for the loan; the primary benefit of using this method over a bank is that the qualification process is much less stringent.
In continuing with explaining the “hard money” element of financing for flipping, it’s important to understand that though hard money lenders will look at some qualifications, they primarily focus on (in our experience) the deal and the house you are buying – rather than your credit. Here’s the thing, though: Hard money lenders may charge you points in addition to other fees that you won’t experience with private lenders, their rates might be higher and you usually have to put more down to receive the loan for the purchase of the property.
What does this all mean?
If you go down this route when attempting to flip some Huntington Beach homes, you may need to come up with additional capital beyond that provided by your money lender for rehab and caring costs.
Now, in that original blog we keep referring to, we also discussed a Joint Venture, or JV, which is where you split the profit of a sale with someone who wants to perhaps be in on your “flipping action;” let’s go a bit deeper into this by sharing a real story.
A few years ago, we knew someone who started flipping Orange County real estate on a larger scale, and he had a big equity partner who put up a great deal of capital for him to do this. The partner was quite experienced in flipping Costa Mesa real estate, but he found himself with more capital than actual deals – so it was worth it to him to partner with the flipper while the flipper provided the “grunt work” on the deal. Ultimately, the gentlemen split the profit – but in doing this, the flipper was able to increase the number of houses he was able to buy while catapulting his growing house-flipping business.
Into this foray also comes what we call “creative financing,” which is where you work with a seller to come up with terms for the purchase of the property. They can “carry the note,” which refers to you signing a note (an agreement which outlines the terms) in order to make payments directly to them for the property. It is also possible to take over their payments; in fact, we know some people who are currently doing this with some Huntington Beach real estate, allowing these individuals to save on financing costs and more.
If these folks have had to pay hard money – as we discussed earlier – for financing the property, the numbers wouldn’t have worked out to seal the deal. In these cases, the flippers basically take title (ownership) of the property, but the loan remains in their name, and they agree to make mortgage and other payments during the time they own the property. When they go to sell it, the loan will be paid off from the proceeds and the flippers will be left with their profit.
It is also possible to combine or fuse various types of financing; for example, you might have a hard money loan on a property but still need $50,000 to cover the remaining cost of the purchase and repairs. In this case, you could work with a private money lender to cover the difference.
Here’s the quasi-bottom line: Financing is a lot more flexible, creative and brimming with possibilities than most people in the flipping business realize. We could go into a lot more detail about methods to finance a house so you can have as many tools at your disposal as possible, but try to digest what we covered here because we know working with lenders can be confusing at times.