By Tod Snodgrass
Our firm provides private capital to fix/flip and pure flip Real Estate Investors (REIers.), via loan brokers. We are frequently contacted by those who wish to flip or fix/flip a property, but don’t have the needed capital to pull it off successfully. With the deal secured, and only lacking the funds to make it happen, REIers often go in search of OPM: Other People’s Money. Smart idea. Using OPM allows the REIer to leverage themselves into deals that they could not otherwise conclude successfully.
Different Shades of OPM
Traditionally the REIer finds a good quality SFR (Single Family Residence), at a substantially discounted price (35% to 65% off of current, fair market value—FMV–is preferable). First step is to acquire the property with a low enough LTV (Loan To Value) ratio to make sense to your “money people”. Second, rehab it (fix it up) as needed to enhance its value. Third, put it on the market (list it with a real estate professional) and sell it—hopefully for a good profit. Or just buy, and then flip it.
With the above as pretty standard background, the issue of exactly WHERE the fixer/flipper REIer is going to get the OPM takes on front-burner urgency. Choices can include private capital funding providers such as: private debt, joint venture, Hard Money, private equity, cash-on-cash investors who specialize in TC (transactional funding), etc.
Hard Money Lenders
For example, many fixer/flippers use Hard Money Lenders (HMLers) for most of the needed cash. Problem is, many if not most HMLers will not provide 100% of the REIers cash needs. Most HMLers require cash that the REIer may lack, in part or in whole, such as:
- “Skin in the game” money: say 20% down payment money, other costs, etc.
- Monthly payments: More cash the REIer may lack
- Reserve account funds: This is to cover several months worth of payments
Also, most HMLers prefer to deal with experienced REIers…those who have done several successful fix/flips before. In other words, novices need not apply in most cases since most do not have the money for down payments, reserve accounts, and lack the necessary experience as well.
Private Funding Alternative(s)
To avoid the necessity of coming up with 20%-25% or more of the purchase price, what many REIers concentrate on is finding deals with a low enough LTV, that they can obtain 100% of the money they need for the purchase and/or fixup from one money source. That is where private capital providers come into the picture. If you are able to put a property under contract with a low enough LTV, private money is usually available to fill the need.
FYI: In a best case scenario, private capital firms may provide 100% of the capital needs of the REIer; say for 30 days—long enough, for example, for the REIer to secure a grant deed on the property.
Low LTV properties usually result from some poor homeowner who is in financial distress, and is thus both motivated and flexible enough to want to make a deal in order to trade “cash for keys” with the REIer. This may result from a “deed in lieu” that the REIer arranges with the anxious seller.
NOTE: Another category of discounted properties are those where the title is clouded as the result of a lawsuit, lis pendens, tax lien, pre-foreclosure, probate, etc. First the REIer must “uncloud” the title. For example, our firm can help facilitate removing the cloud on title, thereby clearing the way for the flipper to assign (co-wholesale for example) the property he has under contract, or to use the grant deed he receives to secure longer term financing in order to rehab and then sell the property.
If you are an experienced REIer, with a number of successful fix/flips or straight wholesale contract flips under your belt, and have sufficient capital to cover the portion that the HMer cannot/will not provide, you may be a good candidate for using HML money. However, if you are relatively new to the business and/or lack the needed funds to go the HML route, it is possible to obtain 100% of the funding you need from a private source if the LTV is low enough. That way you won’t have to chase around town trying to find second position gap funding, which is becoming more and more of a scarce commodity these days.
What We Do: Quickly provide short-term, first position, private capital funding, in smaller amounts, to: wholesale contract flippers, fixer/flippers or to investors who own a property free/clear but cannot or will not use hard money lenders or conventional funding sources. See more info below.
Contact info: Tod Snodgrass, firstname.lastname@example.org, 310-408-7015