This morning I was reviewing several deals with one of my mentoring clients. As we went through the list we came to one that he is purchasing to fix and flip.
It’s an unusual deal already because he did a lease option on the property and has already been renovating the house before he purchased it. He did file an Option Affidavit at the court house. He has a good rapport with the Seller and the Seller very much wants to sell the house. He understands exactly what my Client is doing (fix and flip).
As we studied his financing to purchase the property, between the down payment required, points, and closing costs, he needed to come out-of-pocket almost $30,000 with hard costs of about $10,000. So I started thinking about how we could restructure everything to maximize his profits.
He should be able to complete the renovation in about 2 weeks. It’s a hot market (like most markets right now). Instead of buying the house now, and then reselling it in 45-60 days, I suggested that he and the Seller jointly market the house and find a buyer.
The new Purchase & Sales Agreement (PSA) between the Buyer and the Seller will be for the full ARV amount, with Stipulations that the Seller will pay my Client the difference between the original price and the new PSA price as two fees: (1) $xx for the Repairs and Upgrades, and (2) $xx as a fee to release his Affidavit of Option. In the calculation we allow the Seller to net an additional $2000 in the transaction so that everyone wins.
My Client saves $8,000 in hard costs ($10,000 – $2,000 for Seller); plus he doesn’t have to come up with the down payment; and his profits are taxed as ordinary income as opposed to short term capital gains. The Seller nets an additional $2000 and has the house SOLD. Everything is fully disclosed to the Lender and represented properly on the Settlement Statement.
On another deal, he is $20,000 short of what he needs for financing. I told him to go back to the seller and ask him to provide $20,000 in Seller Financing for 1 year or when the house resells at 5% interest. We already know that the Seller just wanted the house sold, but did not have immediate needs for the cash. Again, everyone wins.
Finally, he is looking to buy a probate house from the Executor of the Estate for $340,000. The house has a $300,000 mortgage and needs just $30,000 in repairs. I suggested that he buy the house subject to the original loan which is in good standing. Get a private loan for the balance of the purchase price plus repairs ($70,000) and save the cost of getting a hard money loan for the whole project.
When you have a solid understanding of creative financing techniques you can close more deals and definitely create additional profits. That is why I ask to be involved in the negotiation stage of my Clients deals so I can help them structure the best deal. Profits are made when you create the deal, and realized when you sell.
Expect abundance,
Lou Castillo
