How to Flip a House Using Other People’s Money
Flipping a house is easy if you have plenty of cash on hand. But what if you’re long on skills and short on greenbacks? The answer is to use what is known in real estate industry jargon as OPM, or other people’s money. Using OPM to fund a flip can take many forms, a few of which will be detailed later in this article. One method used by a Las Cruces resident, whom we will call Mike, was to generate cash using an asset he already owned.
Mike is a government employee who was looking for ways to supplement his income by knocking down houses. The asset he owned was a 2.5 acre piece of land behind “A” mountain in the Soledad Canyon area. After talking to his tax specialist and his real estate agent, Mike put a plan in place to attempt his first flip. His plan included using his lot’s equity to generate the cash needed for the 20% down payment and closing costs needed to complete the buy portion of the rollover.
After shopping around for a property he could buy below market value, Mike chose a 3-bedroom, 2-bathroom HUD repossession in the Loma Heights area and made an offer on the repairman. He then went to a local community bank and took out a line of credit on his 2.5 acre lot to generate the 20% down payment and closing costs needed to rock the deal.
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At the same time, Mike made arrangements with the community bank to take out a construction loan to pay the remainder of the purchase price and cover the cost of repairs. Using the two loans, Mike financed 100% of the purchase price, his closing costs, and the costs of his repairs and shipping, without using any of his own cash.
After painting the house inside and out, installing new flooring throughout, and updating the light fixtures, countertops, and window coverings, Mike put the property up for sale. After 15 days on the market, a first buyer bought the house at the full asking price. After paying off his line of credit and construction loan, Mike’s pre-tax net profit was very close to $20,000. Not bad for a novice.
Potential pinball machines that don’t have an asset to leverage to generate the money needed to run a pinball machine can fund their business in a number of ways. One possibility is to partner with someone who has money to invest. Close friends, relatives and business associates are often good partner candidates. Partners can fund only the down payment, closing and repair costs, or can fund the entire project.
Hard money lenders are another great source of funding, although they usually charge very high interest rates which can quickly erode profits if the rollover is not done in a timely manner. Hard money lenders focus on people who are not qualified for loans at normal interest rates and usually charge 10-15% or more for the funds.
Private lenders are arguably the best source of financing. Private lenders are ordinary people who have money available to invest. The key to inspiring these people to participate is to offer them a high enough return to make their investment worthwhile, while being fair enough to maintain a decent pinball profit margin.
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Crowdfunding sites, such as CrowdStreet and DiversyFund, can also be a good source of funding. Investopedia recently published a roundup of this year’s best sites: https://www.investopedia.com/best-real-estate-crowdfunding-sites-5070790 and details how each works.
Leveraging the equity in your own home is another method of financing a turnaround, but the choice comes with the ultimate risk of losing your home if the plan goes wrong and the loan can’t be repaid as planned.
How popular is flipping? According to the folks at Atom Data Solutions, curator of the nation’s leading real estate database, 94,766 single-family homes and condos were returned during the third quarter of last year. That figure represented 5.7% of all home sales nationwide, down from 5.1% in the prior quarter. The report also notes that the average pinball machine made a profit of $68,847, up 2% from the second quarter.
Ultimately, flipping a house can benefit many. The flipper, investor, and/or bank each make money, the buyer gets a clean, fresh turnkey home, and the neighborhood benefits from rehabilitating a run-down property that could easily have diminished values. in the neighborhood.
Meet at closing time.
Gary Sandler is a full-time realtor and president of Gary Sandler Inc., real estate agents in Las Cruces. He loves answering questions and can be reached at 575-642-2292 or [email protected]