DOES THIS PLAN OF ACTION WORK?

General Real Estate Investing
1

I’m trying to develop a plan of action to go toward the “pretty houses” in my area (100k+). It’s basically focused on wholesaling properties and I would appreciate it if I could get some feedback to see if what I’ve learned so far is correct. This is an example of the kind of deals I would like to search for, and if its correct then I shouldn’t have a problem finding and closing them. Please educate me on any possible flaws in my plan. Here we go…

SFH-ARV $100K
Repairs,holding costs (2 months)- $10K
Offer- $60K

Basically I would approach a HML for the 65% of the ARV. Purchase the house for the 60K and pocket the 5k from closing. Sell the property to another investor IMMEDIATELY for 80K (leaving 20K in equity for them to play with). Pay off the HML the 65K and a pre-payment penalty of 5k (I’M ASSUMING ITS THAT MUCH) for a 70K total. Leaving me with a 10K back-end profit. Total profit 15K.

Worse case scenario: I would rehab and sell the house as a “First-Time Homebuyer special” by offering an automatic 10K in equity (90K sale to cover additional holding costs) and assisting in obtaining their financing with my conventional lender. total profit approx 25K

I hope I worded this right, PLEASE let me know if i forgot something or am just plain crazy :hammerhead:. Thanks in advance.

2

$10k seems really low for repairs and holding costs. That’s especially true if you are using hard money. They usually charge points and higher interest rates. The only rehab you’d be able to afford is carpet and paint.

2 months for rehab and holding the property is very short. You have to remember that there’s usually a few weeks between a good offer and the actual closing. You’re still paying the mortgage during that time. You’d want to have buyers lined up after you sign your PA and before you close.

It might work. Of course it all hinges on you being able to buy a home for $60k that’s worth $100k ARV that requires under $5k in rehab since holding costs and HML fees will eat the rest of your $10k.

3

He said he is buying pretty houses. The only problem is finding the deals which fit those numbers.

4

Problem #1: HML do NOT give cashout at closing loans. So no pocket money. At 5-10 points and 12-18% interest WHY would you want it even if you could cashout?

Problem #2: Borrowing from HML costs points, either upfront or in loan. So, if you offer $60K, at 5 points, you’re charged $3K. Most have a 3 month prepay minimum, so at 12%, that’s about 1800. There’s your $5K cashout.

Problem #3: Is the $10K in costs yours or your investor/buyer? Either way, there’s a problem with your figures. If it’s yours, then with $65K in loan costs, you’re at $75K. Assuming you get $80K, you’ve only made $5K, not $15K. If it’s the investor/buyer’s cost, then if they buy at $80K, plus $10K in costs, they only have a $10K gross profit.

Problem #4: I know of no professional investor that would buy a property at a 10% discount (assuming they’re doing repairs). The standard rule is 70% of ARV. So even if there is no repair work, the average wholesale price expected is $70K, not $80K. A fire sell will eat up 20% equity like a termite on wet piece of wood. Heck, in most cases, a standard sell will cost you 10-15% of that “equity.”

Problem #5: Most “pretty houses” needing little to no work are usually newer homes (5-10 years old tops). Problem there is most of the sellers don’t have 40% in equity. Even if they wanted to take an offer of 60% of the value, they couldn’t unless they came out of pocket to do it.

Possible solution: Make offers in the 70-85% range, finance either conventionally or thru private funding, then sell to credit challenged buyers thru your bad credit lenders. If you hook up with a good mortgage broker, they should be able to get most buyers 90-100% financing. You could also offer to take a seller held 2nd mortgage and collect the monthly off of it.

Raj

5

Thank you all for your comments, I am confused about a couple of items though, once again, i’m still a bit new to this so sorry if I’m confusing certain things i’ve read:

Raj:
Problem #1: I have read (loosely) in a couple articles and books about people receiving cash at closing using HML’s and a double closings. Was i misunderstanding the process in terms of what it is I’m trying to do or is that outright incorrect?

Problem #2: I didn’t thank about that, thanks for the Info.

Problem #3/4: This is where most of my confusion comes into play. I did not know of the inital costs for a HML so I didn’t include them in my estimates. Basically I’m assuming that with what your saying, a Wholesaler cannot utilize the “70% rule”. I would have to purchase 60% or less in order to make a decent profit by selling to an INVESTOR for 70%. I was also looking to sell to “BUY AND HOLD” investors who would see the “10%” discount and the opportunity of positive cash flow. Is this not enough of an incentive? I also intended on having a buyer set up once I sign the contract so holding time in incredibly short. I would like to eventually do double closings to cut the time as low as possible.

Problem #5: After researching the definition of “pretty houses”, the category of housing here is a bit different. Our market for pretty houses in the city focuses more on classic victorian style housing for $100k+ instead of New builds. These houses push around 30+ yrs at least. Because of the “history” behind the houses they are usually kept “interfamily” and either rented to college students or eventually lost due to elderly houeowners. This coupled with the lower housing costs (ie: 40k for a 3000 sq ft 3/3 double near a college campus) easily creates many 40-60% equity spreads in properties (along with frustrated “self-proclaimed” landlords). This is my target market.

If I still have a misconception of these ideas please let me know. thanks again for all the comments. ;D

6

Again, I know of no HML that will allow you to take cash at closing. They escrow any repair money and you don’t get that until they inspect the property and insure that the work was actually done. Even if you find one, why would you want to pay that kind of interest just to have cash in your pocket?
As to double closings, yes, you’ll get cash in your pocket there, because you are closing with the end buyer (assuming that you make a profit :))

As a wholesaler, you are selling to investors that use the 70% standard, so you’d have to be buying for less than that to make a profit. I can’t think of any type of investor, landlord or otherwise that would only take a 10% discount (and that’s assuming that your repairs aren’t under budget). As stated, 20% of any equity is gone in a fire sell, so most buy/holds want to be there at worst. The only type that would be interested in 10% discounts are speculators that bank on appreciation rising faster than inflation/interest rates.

If that’s a pretty house in your area, great. Potential problem that I see is that 30+ year old houses, and especially “interfamily/elderly owned” houses, will need more than $10K in work.

Is $40K for a 3000hsf retail or wholesale? If it’s retail, that’s not much of a market, no offense. Just because your target market may have the possibility of 40-60% equity doesn’t actually mean that there a) is equity (the could’ve refi’ed) and/or b) that they’ll give it up.

Raj

7

Well to be honest at this point I’m pretty much speechless. I appreciate the info and you’ve definetly given me some more to look at in great detail. I’ve seen many of your post’s on the forum and i’m glad that someone with a strong history was able to give me an honest opinion on my ideals.

The unfortunate point is that I’m kinda back at square one now. However, that is just an unfortunate sidestep and will be dealt with accordingly. Thank you again for the input RAJ, and if i may pose one last question, “HOW DO YOU DO IT” what is one example of how you got started? I think I can make it through my first deal (though I may stumble through it), but its the second that keeps me worried. Thanks again for the info, you’ve helped me more than I think you know. :elephant:

8

I started pretty conventionally. Creative investing doesn’t always have to be so “creative.” They probably shouldn’t call it that. Maybe then, people wouldn’t get so confused.

My first property, I bought for $45K. I borrowed $4.5K from an equity line that I had to pay for down and closing costs, and got a 95% NOO loan. Property needed some light PP&C (patch, paint & carpet). ARV = $75K. I changed the doorlocks and offered it on L/O as a handyman special for $65K - low down/cheaper price in exchange for work. This happened two weeks after closing. I went to my bank and refinanced for $55K. paid off my equity line, and put $10K in my pocket, and about $300/month positive cashflow a month.

Another early one, I bought from HUD for $67K, put in $5K in repairs and sold for $90K to a buyer who thought that they couldn’t get financing, but with the help of my mortgage broker, they qualified for 100%. After all closing costs/expenses, I netted $12K for 3 months holding time.

Raj