Dollar Signs and Ms. Lowball
By: The Smartass
As I stated in one of my previous blogs, because of the slow
market in my area, I decided to look at other avenues of revenue including the
possibility of a flip.
In late February, I was on the phone with Ms. Lowball who
was in a highly excited mood. She told me about a potential deal where we could
make $70,000 on a single flip.
Now, you have to understand, that when big numbers are
concerned, Ms. Lowball is like Peg Bundy and Bon Bon’s….she’s on a mission.
We had put some feelers out that we would partner with
someone if they brought us deals. I had been looking for some time at the
neighborhood I great up in. It’s a hot area and I lost a chance at a home there
last year to….you guessed it….a LOWBALL offer! (Someone is STILL hearing about
this, I assure you!)
Anyway, there was a wholesale deal for a 3,000 square foot
house for $150,000 with about $60,000 worth of rehab. The deal was brought to
us by a general contractor and the market analysis said it would be worth
$280,000 when complete. The prospective partner was looking at a rental or a
flip with a 65/35 split in our favor. He would do the work and use his credit,
we supplied the cash and property management.
Ms. Lowball was a lot like a kid before Christmas with
dollar signs dancing in her oversized head.
She might be a genius with real estate and spreadsheets, but
without a calculator she is like Elaine when she has too much sex!
So I told her, “Let’s look at the numbers. For a rental you have
$210,000 which is 75 percent….not the 70 percent I am looking for, but still a
great number. This is a wholesale deal, so cash out of pocket would be nine
percent, closing costs around $18,000 and an additional five percent above the
70 percent loan to value margin we would have to pay. All in? $28,500. Our mortgage
would be approximately $1,900 and the market rent in that area would be $1,900
to $2,000 a month.”
Houston, we have a problem.
The equity capture is okay for now, but the passive income
sucks!
So now, let’s look at the flip. The hard money loans I use
don’t allow flips, but we found a hard money lender used for flipping, but they
wanted 75 percent of the loan in reserves….in our bank account. This means we
would tie up over $150,000 until the flip is complete. We would still need
$28,500 to close and the projected rehab time was two to four months.
Hard money loans are about 12 to 14 percent, so we would be paying $2,300 a month mortgage for four months which is $9200. The closing costs on the sale of the home would be about an additional $14,400.
Hard money loans are about 12 to 14 percent, so we would be paying $2,300 a month mortgage for four months which is $9200. The closing costs on the sale of the home would be about an additional $14,400.
So, where are we now?
$70,000 - $28,500 - $9,200 - $14,400 = $17,900. Not a bad
little profit, but split at 65/35 we would walk away with $11,700. Add in capital
gains tax and our profit is reduced to around $8,000 for a $28,000 investment
and holding $150,000 in reserves if and only if everything goes right and the
house sells!
I am sure there are cheaper ways to finance a flip, but
unless it is drastically cheaper, these numbers don’t work for me.
Too much risk for every little reward.
Sorry, Ms. Lowball, no Bon Bon’s for you!
Note to Ms. Lowball: Even though you can’t add your way out
of a paper bag, you are still loved and appreciated!
The Smartass
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