i need some advise, a friend and i are thinking about buying a foreclosure in our neighborhood.
we were going to pay cash at the sheriffs sale and then take out a loan to pay ourselfs back.
we think we can buy this house well under appraisal.
our plan is to totally remodel the house and sell it in the next year.
how do we protect each others interest?
how do i protect my interest???
should we deposit all dollars with a title company and draw off that?
get a construction loan?
should we have an agreement drawn up by a RE attorney?
can you foresee any problems in securing a loan on the property once we have title to it? we want to borrow enough to complete the rehab, and maybe 6 months worth of payments.
what type of loan would be best???
we have no experence with foreclosures, flipping or remodeling.
any pros and cons (do’s and don’ts) to this situation would be appreciated.
thanks mike
Lots of good questions and it really comes down to what kind of relationship you have with your friend. I did a 50/50 split with a friend and we just wrote up a document that spelled out who would pay for what and be responsible for what and how the profits would be split. It worked well.
My advice would be to have a clear exit strategy or strategies (more is better). Real estate isn’t moving as fast anymore and you may have to hold it a while if your trying to find a retail buyer.
Also, I don’t know that buying at a sheriffs auction is the best thing for a person starting out. You may end up paying more than you should.
If you want a legal structure to your partnership you could setup an LLC with 50/50 ownership to buy the property in. Just a thought.
As far as paying cash and refinancing, I think a construction type loan makes sense or a hard money loan. Unfortunately, you may pay cash and not be able to find anyone to refinance it. You should check that out first.
Keep in mind (if you finance the purchase from the start) that most lenders/HMLs will only give you the money you need to make the purchase and any loan proceeds to be used toward rehab are typically distributed on a draw system as work is being completed (i.e., you may have to have enough cash up front to pay your contractors/suppliers until you receive your first draw - or get the contractors to wait for their money until the first draw). So if you have cash now you may want to hold on to some of it to start repairs and use an HML to make the initial purchase. An HML will typically loan up to 65 to 75% of the home’s After Repair Value and charge 12 to 16% with 1 to 6 points due at closing (which they will roll into the loan, along with all the monthly payments, so you pay nothing at close or during the length of the loan). Minimum terms are typically 4 or 6-months with renewals costing a couple of points.
One way to handle the partnership issue is to form a, Member Managed, LLC. At the time of formation you will draw up Articles of Agreement that spell out how things get split up among its’ members (you don’t necessarily need an attorney to do this - look at samples in an LLC formation book). There are online companies that will do the initial filing with the state for $300 to $600. File the LLC in your own state (not NV). When you file the LLC you will also apply for a Federal EIN with IRS.
Once you have your EIN, open a business checking account with both of you being authorized signers. You can also make it so both signatures are required on all checks you write so decisions are made incrementally along the way to help avoid conflict later.
I’m not an expert on finance so you may want to check with your bank to see if there is a minimum amount time that your names have to be on the Record of Ownership before they will do a post purchase loan (that is if you’re going to pay cash to buy and then finance later).
The best advise I can give you on rehabs/flipping is to FIRST determine what fair market value is for the home after repairs have been made and then sharpen your pencil BEFORE you buy and determine, percisely, how much EVERYTHING will cost (to the penny) and then add a hefty contingency allowance to it. I started rehabbing in the early 80s as a contractor - now I buy, fix, & flip and I still add 5 to 15% to my estimates to cover the unexpected. You may want to add more! You can also use the Marshall & Swift Home Remodeling & Repair Estimator book ($80 on their web site). I understand Home Depot also sells one but I have no personal experience as to the accuracy of their numbers.
Remember, the real estate market is in decline - allow for it if your flip is going to take time to complete. And if you list it in the off season/winter, it will likely take much longer to sell.
Very best luck to you! (But it shouldn’t be needed if you’re thorough with things)