By JEFF LAZERSON / CONTRIBUTING COLUMNIST
Even in this tighter than tight, low-inventory market, there are plenty of home flippers reaping handsome rewards by leveraging from other people’s money and time.
It starts with some aggressive financing programs for both the property purchase and rehabilitation.
One particularly interesting program offers not only acquisition financing for up to 80 percent of the sales price but also financing for up to 75 percent of the repairs and improvement costs.
For example, let’s say you strike a deal to pay $750,000 for a property. Your down payment would be $150,000. Your interest-only loan would start as low as 8.5 percent and be funded in as little as 14 days. Unless the sales price is $2 million or more, you don’t need an appraisal. You will need something called a broker price opinion, which costs $295 in this instance.
Let’s say your fixer requires $100,000 in repairs and improvements. You could get additional financing for 75 percent, or $75,000. You do have to advance the funds for the repair portions, but will be reimbursed later.
It’s not cheap. You will pay 2 to 4 points, but no prepayment penalty in this example.
Two fatal mistakes made by home flippers are cash flow (you run out of money to fix the property and carry the monthly payment) and overpaying for the property you intend to flip, said Tedd Gerstenfeld, account executive at Redondo Beach-based Civic Financial Services.
How do you find these flipper opportunities?
One way is to look for emotionally distressed (tired) properties in neighborhoods that have comparably improved properties worth more. You need to look at 100 properties to to find one that’s suitable, said a spokesman for The Point, a Dana Point based flipper company.
It takes discipline too. The Point targets a 30 percent gap between the buy and sell price. If The Point pays $500,000 for a property, it wants the sale price to be $650,000. It wants a 20 percent return on its investment. And, it wants the property ready for resale within 60 days.
If you aren’t putting in “sweat equity” by doing the work yourself it’s a must to have a ready and able quality contractor.
Leverage your time. A common way that some smart flippers find properties is engaging a very sharp realty agent. Once the property is ready for sale, the agent gets the listing and some type of bonus based on profit or based on the amount paid over a set sales price.
Lastly, always crunch the numbers with your tax preparer or someone who really gets this stuff. Include not only the hard costs and the monthly carrying costs but also how much of your time this will cost. Be conservative. Chop your honest profit estimate by 20 percent for unforeseen expenses and unforeseen changes in the marketplace.
Jeff Lazerson - Mortgage Columnist since 2011