Equity in a flip - Posted by Brian R


#1

Posted by Sean on February 20, 1999 at 08:47:17:

I don’t have good credit. I’m not willing to pay a bank 1.5 points plus origination and appraisal fees while they make me jump through loops to prove I’m a responsible person. I usually operate on inexpensive properties around 30k-45k and few banks in my area will loan less than 50k on real estate. That way the seller knows either he has to provide aid or he has to wait for someone who can come in and buy “all cash.”


#2

Equity in a flip - Posted by Brian R

Posted by Brian R on February 19, 1999 at 12:36:44:

Hello everyone, this is my first posting to this forum. I’m considering doing some real estate investing part-time, maybe going full time if I’m succesfull.

I want to start out by doing some flips so I can earn some money, get to know the business, and make contacts. So my question is this:

Why is equity such an important factor in considering a property to flip? I can understand avoiding a property with excessive back taxes, liens etc. but why avoid a property with little equity?

Please excuse me if this is a stupid question, since I’m new to this. Any pointers to a good book, website, or study course regarding flips would be appreciated.

Brian


#3

Re: Equity in a flip - Posted by SCook85

Posted by SCook85 on February 19, 1999 at 20:06:11:

Stacy did a good job at getting to what flipping really is. Flipping properties is wholesaling them. Wholesaling is a quick process in which all cash investors (usually rehabbers) buy properties and pay you what is refferred to as an assignment fee. As in any other business when someone buys something wholesale they are buying it cheap and the amount between what they purchase it for and sell it for is usually margin, in real estate the term is equity.
Retailing houses is a long process and takes a lot of time. Holding costs alone prevent you from flipping homes to make $2-5k in profits. You need to buy contract homes that will sell quick and those homes are your bargains.
There are things that you can do with homes that have little equity and the Lease Option people from this site can help you with that, it’s more involved then flipping but can also be more lucrative-- just a different process.

I hope this helps.

Steve


#4

Re: Equity in a flip - Posted by Sean

Posted by Sean on February 19, 1999 at 16:30:09:

All creative financing is made easier when the seller has a lot of equity. The simplest method to buy a property with no cash out of pocket is to obtain a new loan to give the seller the cash to pay off his loan and enough to cover the closing costs, and then to give him a second trust deed for the remaining balance.

The problem is most banks won’t do this, so you need to go to private individuals. They often want to loan only up to a certain percentage so that they have a lot of security. Perhaps you find one that will loan up to 60% of the value of the property.

If the seller only owes 50% that makes it easy. You borrow 60% from the lender which gives the seller 10% of the value of the house in cash to pay off his Realtor and escrow costs and 40% in the form of a note. If, on the other hand, he owes 90% you’d need to get a 100% loan and that’s much more difficult to do.


#5

Re: Equity in a flip - Posted by Duane

Posted by Duane on February 19, 1999 at 13:03:23:

I think the general answer will be (since I haven’t actually done one yet) because you have more room to negotiate when you buy and when you sell. You may have a difficult time finding a buyer if you are asking, or have to ask, near FMV. Unless of course you are offering some great terms, but ‘terms’ sort of implies that you are helping the buyer with financing somehow, which defeats the goal of making some quick cash anyway. A place with enough equity will allow you to buy (or tie up with contract) at a price that you can still make a profit on, while allowing you to sell quickly (flip) because your buyer still got a decent deal.


#6

Re: Equity in a flip - Posted by Stacy (AZ)

Posted by Stacy (AZ) on February 19, 1999 at 12:52:47:

The flipping we usually refer to on this site are wholesale flips. This is where you act as a middle-man of sorts, passing properties that need to be repaired to another investor who does rehabs. You need to get the property under contract at a low enough price so that your profit, the rehabbers profit, the fixup costs, and the holding costs can all be recovered when the property is sold at it’s FMV.

Suppose the ARV (after repair value) of a house is $100K. This is the retail price to a person wanting to buy and live in the house after it’s been fixed-up.

Suppose the house currently needs about $15K to fix it up before it will sell for retail. Suppose the rehabber needs to get $10K profit before he feels it’s worth his time and effort to take on the project. Also, suppose this property will take 3 months to fix and resell, with approximate holding costs during this time of about $3K. Finally, suppose the profit you want for flipping this house is $5K.

Let’s add it up. $100K - (15K + 10K + 3K + 5K) = $67K. So, the minimum you could buy this house for is $67K. If the owner still owes $90K on this house, you will not be able to buy it for $67K since there is not enough equity. If he owes $50K, he can sell it for $67K and still see some profit.

This is a simplified example. Hope it helps.

Stacy


#7

Re: Equity in a flip - Posted by JPiper

Posted by JPiper on February 19, 1999 at 18:18:08:

Sean:

There are lenders who will do 100% CLTV loans (combined LTV)…non owner-occupant. This combines an 80% first mortgage from the lender, with 20% seller carried financing. You need A credit, and you’ll need to provide full docs.

My suggestion would be to call a good mortgage broker in your area. If you’re in California call Ed Garcia.

I posted the lender name within the last two weeks…you can search the post in the archives.

JPiper