Hard Money Facts

Whether you were flipping houses long before Chip and Johanna Gaines had a television show or you’re just now considering dipping your toe into the industry – this market is sure to leave you wondering if now is the time to start (or continue) your fix-and-flip journey. Together, we’ll be looking at the opportunity for profit and the obstacles that currently stand in the way.

1. Is the current market conducive to making a profit?

Home prices are still on the rise. The nationwide median listing price for active listings in September 2021 was $380,000, up 8.6 percent from the previous year and up 20.6% compared to 2019. The S&P CoreLogic Case-Schiller Index published the Home Price NSA Index on September 28, 2021, revealing home prices had soared 19.7% in the last 12 months. With affordable housing inventory still low and buyers (or renters) incredibly hungry for a place to call their own, sellers are being showered with offers that are much higher than list price. No one know when the market will flatten out or turn – that’s why it is so important to never forget that there are still other market factors to take into consideration when assessing an opportunity.

Now that we’re less than half a year away from 2022, what do we know so far about 2021? In the last year alone, median values of single-family homes and condos rose more than 10% nationally. This rising surge of new house hunters and a super tight supply of housing inventory was also impacted by an ongoing pandemic. With mortgage rates remarkably low, home buying became an attractive option for many Americans seeking more space, a second home, or a work-from-home office with a better view.

SLIGHT DIP OR REAL DOWNTURN?

Now, halfway into the 10th year in this housing boom, many home investors wonder: will real estate markets flatline or drop? How long will these high prices last? While we can’t see into the future, we have some new data about how 2021 compares so far to prior years, both before and since the housing boom. According to a report from ATTOM, fix-and-flip real estate investments have fallen to the lowest level since 2000. In the first quarter of 2021, the same report cites only one in 37 transactions, or only 2.7% of home sales, were flips. Compare that figure to where we were in the first quarter of 2020: down from 7.5%, or one in 13 sales were categorized as fix-and-flips.

The secret to successful real estate flipping is knowing which improvements attract buyers and enhance the value of the home.

Here are some of the win-win improvements that make buyers and investors both happy.

1. Minimize Costs By Choosing Wisely

The bones of the home, i.e. the basic framework and layout, determine the size of the rehab budget. Jonathan Faccone, Founder, Halo Homebuyers LLC, has this sage advice for flippers: “When choosing a property, look for houses that can be improved without being reconfigured.” That’s particularly true if you want a house with an open concept, or if you envision adding value by adding a bedroom or bath.

Simply put: Painting walls is cheap. Moving walls is another story. If the old adage “you make your money on the buy” is true, then finding a floorplan that works as-is yet needs some love and attention is critical.

2. Cost-Efficient Kitchen Remodeling

A nice, remodeled kitchen is a huge draw for potential buyers. One caveat: It’s easy to go overboard. If you gut an entire kitchen, a mid-range remodel can easily run up to $60,000 — and net you only a fraction of that when the time comes to sell.

It pays to make your kitchen shine when you do it cost effectively:

• Sand and paint cabinets instead of replacing them.
• If paint isn’t enough, try replacing the doors instead of demoing the cabinets
• Instead of a $4,000 stainless fridge, find a tasteful one on sale for $1,000.

Remember: Your hard money loan is generally limited up to 70% of a home’s after-repair value. Choose the remodel projects wisely.

A large segment of today’s housing market is fueled by real estate investors seeking to turn a fixer upper into a nice, tidy profit. If you manage to avoid the common rehab pitfalls, you can turn a profit too! But know, mistakes are not made by properties. Mistakes, most often, are made by novice investors and the assumptions they employ on their way to becoming a seasoned investor.

The good news is that the most common mistakes investors make are entirely preventable…if you do these seven things:

1. Underestimating The Project Scope

Underestimating the time, hard costs and the amount of work involved is one of the surest ways to drain the profitability of your flip. You estimate four months of work – it takes six. You estimate for some new shingles – you need a new roof. You estimate your property will sell in four weeks – it sits unsold for three months. In short, each inaccurate estimate makes a direct impact on your bottom line.

2. Underestimating Or Ignoring The Non-Material Costs

Drywall, flooring, windows and landscaping aren’t the only costs that will go into your flip. To turn a profit, you will need to anticipate all the other “soft” costs you’ll incur including: appraisals, closing costs, building permits, inspection fees, realtor costs, property taxes and utilities, as well as interest from the real estate investment loan.

It’s easy to fall into the trap of thinking: “those will be covered when I sell”. But that’s just another way of saying: “it’ll come out of my profits.” Wise investors anticipate those costs up front and build them into their overall budget.

Your contractor can have a profound impact on almost every aspect of your real estate flip: deadlines, quality of work, budget, and return on investment. And whether the overall experience will be energizing or draining can also depend on whom you hire.

So, if you’re funding a flip, or using a hard money lender, it’s important to keep your flip on schedule and on budget. We all know that time is money. But unfortunately, not all contractors understand or care. Follow these steps and you’ll be able to find good contractors and build lasting relationships with the ones who come through for you.

Flipping a house requires money – lots of money. Beyond the purchase price, single-family investors must come out of pocket for legal fees, appraisal fees, title costs, closing costs, home inspections, rehab costs and disposition costs. In a Seller’s market, these costs have a tendency to go the way of home appreciation…up, up, up and away. Given the median purchase price for existing homes in June 2020 of $295,300, these numbers add up fast especially when you are doing more than one flip investment at a time.

Whether you are flipping one, two, or dozens of houses per year: maintaining adequate cash reserves is critical to keeping your operation up-and-running, so that you can realize the back end profits associated with your investment. As they say…cash is king!

That is why so many single-family investors look for a financing partner to fund their fix-and-flip investment properties. Having more cash on hand gives you, the investor, flexibility in a dynamic market whether that means more cash to realize an unexpected opportunity, more cash to negotiate a better deal with a faster close or more cash to give you peace of mind through the investment cycle. Knowing which available financing options will give you the most flexibility as an investor is the key.

The pandemic has changed our lives and the economy in major ways. For many Americans, it has meant making the switch from working at the office to working from home. And it looks like working from home will continue permanently for many workers, even though some offices have reopened. With the flexibility of working from home, many Americans have opted to change where they call home. You may even be reading this from the comfort of your own home or local coffee shop!

With this new flexibility, some Americans have opted for a new view from their home office window. They are heading for both rural and suburban areas. We’ve witnessed younger households swap city life for the suburbs, while elderly Americans have hurried the decision to relocate to their retirement destination. Others still, have found refuge in country living. So, what’s left to buy, rent, fix, or flip?

To help you on your journey from rehab to rental, download the free Investment Rental Property Neighborhood Checklist.

How Can Single-Family Rental Property Investors Thrive in the Current Market?

All this has meant a hefty surge in demand for suburban single-family homes, retirement locales, vacation homes and investment properties. And while prices of homes in those markets have skyrocketed, both seasoned and first-time rental property and/or fix-and-flip home investors would be wise not to overlook other options with big potential. The flip side of this current real estate market is that with home prices spiking, little inventory, and high construction costs, an urban buy-to-rent property might be your next best investment opportunity.

Even as the talk is still churning about the swelling suburbs, it’s time to take a second look at urban areas. Urban areas have shown a growing increase in both revitalization and investment. Recent real estate market reports  also indicate that this urban renewal and resurgence began in the spring and should swell well into summer.

What conditions have created this opportunity for the buy-to-rent investment? There are two factors at play: First, an increasing number of young and would-be first-time home buyers are being priced out of the suburban markets where they find themselves looking for a home. Second, many of the most urban areas have been negatively impacted by this suburban “flight to quality." These two factors could create some urban buying opportunities for the single-family rental investor as the undertow brings the urban dweller back to the city in search of a rental home.

The opportunity for buy-to-rent is here. And whether you are new or a seasoned investor, you won’t want to go into new territory without the right partner. That’s where Residential Capital Partners comes in. We can help you decide if a buy-to-rent investment is right for you.

Your inbox: it’s overflowing. Your desk: it’s piled high. Your mind: it’s scattered, to say the least.

A seller’s market can be a godsend when you’ve just rehabbed a promising fix-and-flip property. But when a seller’s market brings you a high volume of offers, things can get complicated fast. Overwhelmed by your good luck, you may be tempted to simply select the highest offer from the stack.

Don’t. Competition breeds excellence. Use the forces at play in the market to your advantage. Borrowers may lie to you. Markets never will.

Follow these negotiation best practices:

1. Highest and Best Offer

If you are staring at a stack of offers on your rehabbed property, then you have done something right. Now, take your game to the next level. Study the offers that have come in comparing price, closing timeframe, conditions to close, etc., and use the best terms of each offer to outline what would be your perfect offer from the perfect buyer. Pick the 3 to 5 of the strongest buyers that:

• Have the best price and terms.
• Have the most experience.
• Have the strongest proof of funds letter or balance sheet presentation.

Call these buyers and tell them they have been hand selected out of many to sharpen their initial offer into a Highest and Best Offer. Tell them they have until 5:00 PM to get their final offer to you. Tell them you will call them by 6:00 PM to inform them if they won or lost. If they ask, have your “perfect offer” list by your side to give them a hint of where they need to improve. And then, go enjoy your day until the clock strikes 5:00 PM.

The purpose of flipping houses — or any property — is to realize a profit. Period. From the minute you secure a property with a hard money loan, your focus is turning your property into a tidy profit that you can take to the bank.

Novice flippers normally have their eyes on this prize. They have worked hard to find the right property. They’ve successfully rehabbed and sold a property or two. They’ve developed relationships in the business from sound contractors to hard money lenders, both of whom can move swiftly at their direction to help them realize their goal – profits and more of them.

But once a novice flipper begins moving up the scale of their craft, their eyes naturally drift to more sophisticated ways to realize and protect their profits as they wield their trade. One of these handy tools of sophistication is the 1031 Exchange.

What Is a Section 1031 Exchange?

Section 1031 is an IRS code that allows you to defer paying capital gains on an investment property if you do a “like-kind” exchange of one property for another.

For example, let’s say you buy a property for $100,000, improve it, and the value rises to $200,000. If you simply sell, you’ll be taxed on your gain at your ordinary income level. But if you trade the property for another property of like value, you can defer your taxes until you sell the exchanged property.

The Rehab to Rental Strategy

The novice turned proficient or expert rehab professional can take the opportunity to turn the 1031 Exchange example above into a powerful wealth building strategy. Upon selling the improved property for $200,000, the rehab professional will immediately begin looking for a property of like-kind or similar value to trade into in order to avoid paying ordinary income tax rates on the gain from sale.

When you take out a hard money loan, bridge loan or investment property loan to buy a flip, you do it with one goal in mind: to make a profit.

In the process of your rehab, many factors will conspire to eat into your profits. Weather. Time. Unreliable vendors. The list goes on. But, few things eat away as much of your profits as taxes; the more you make, the more you pay.

One of the most effective ways to protect  your profit margin is to find legal ways to minimize your taxes. We’ve identified five proven ways to minimize your tax exposure – so you can keep more of the money that you’ve worked so hard for.

1. Maximize Your Deductions

You’re not alone. Nearly one year ago, lenders across the United States froze their fix-and-flip lending programs in response to the COVID-19 pandemic. Today, the market is strong and a resurgence of programs abounds—with one pesky problem: they’re nearly all the same.

Susan Andress is the Business Development Director for Residential Capital Partners’ Correspondent Lending Program. In this role, she’s heard the stories of many lenders facing this conundrum first-hand and helped them make their programs more competitive by using Residential Capital Partners’ platform.

Download the Fix & Flip Correspondent Lending Program Highlights to learn more about our 100% fix-and-flip lending program.

Blazing fast approvals.

The market is hot. Turn-around time is critical. Andress says, “The greatest value I can offer my correspondent is responsiveness and speed in underwriting and closing. We’ve made it a very tight process. Lenders will ask me: ‘How quickly can you close?’ and, I say: ‘As soon as you provide us with a complete file!’”

Residential Capital Partners’ program has an edge thanks to their relationships across the nation. Andress reports, “We have an exhaustive list of appraisers in every market which helps the turn-time on every deal. We also have two dedicated people monitoring the underwriting and approval process.”

Residential Capital Partners has also streamlined the process by providing proof of funds letters to approved borrowers. These letters help borrowers secure a contract from weary sellers trying to pick the right buyer.

Correctly calculating ARV (After Repair Value) is no cakewalk. The market changes daily – by city, neighborhood, and street. To be a great ARV calculator, you must be equal parts historian, detective, and fortune teller. Perhaps Zen master, too, because the stakes are high: calculating ARV incorrectly can literally cost you hundreds of thousands of dollars.

ARV, by its nature, is a moving target, and most fix-and-flippers never hit a bullseye. Yet, Michael Blatney, Residential Capital Partners’ dedicated Portfolio Underwriting Manager, is one of the industry’s sharpest shooters. Why? Because he’s been flipping houses since before there was a name for it – and more or less discovered the concept of an ARV.

Make your next property walkthrough a breeze.

So, if you want to turn a profit flipping houses in 2021, when the market is tight and inventory is low, keep reading and heed his advice.