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Nov 08, 2020 How to flip a house using other people’s money

Gary Sandler

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Published 8 November 2020

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’s known in real estate industry jargon as OPM, or Other People’s Money. Using OPM to finance a flip can take many forms, a few of which will be detailed later in this piece. One method that was used by a Las Cruces resident, who we’ll refer to as Mike, was to generate cash utilizing an asset he already owned.

Mike is a government employee who was exploring ways to supplement his income by flipping houses. The asset he owned was a 2.5-acre lot behind “A” Mountain in the Soledad Canyon area. After conferring with his tax professional and Realtor, Mike put a plan in place to attempt his first flip. His plan included utilizing the equity in his lot to generate the cash needed for the 20 percent down payment and closing costs required to complete the purchase portion of the flip.

After shopping for a home he could purchase below market value, Mike chose a three-bedroom, two-bath HUD repossession in the Loma Heights area and purchased the fixer-upper for $84,000. He then went to a local community bank and took out a line of credit on his 2.5-acre lot and tapped the line to generate the $16,800 (20%) down payment and roughly $3,000 in closing costs needed to swing the deal.

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. By utilizing the two loans, Mike financed 100% of the purchase price, his closing costs and the costs of his repairs and carrying costs, without using any of his own cash.

After painting the interior and exterior of the house, installing new flooring throughout, and upgrading the lighting fixtures, countertops and window coverings, Mike listed the property for sale at $132,900. After 15-days on the market, a first-time buyer purchased the home for the full asking price. After paying off his line of credit and construction loan, Mike’s net profit before taxes was very close to $20,000.

Prospective fiippers who don’t have an asset to tap to generate the cash required to get a flip up and running can finance their endeavor in a number of different 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 finance just the down payment, closing and repairs costs, or can bankroll the entire project.

Hard money lenders are another excellent source of financing, although they typically charge very high interest rates that can quickly eat into profits if the flip isn’t completed in a timely fashion. Hard money lenders focus on serving people who are not qualified to obtain loans at normal interest rates, and typically charge between 10 to 15 percent, and more, for the funds.

Private lenders are arguably the best source of funding. Private lenders are regular folks who have disposable cash on hand to invest. The key to inspiring these folks to participate is to offer them a return that’s high enough to make their investment worthwhile, while at the same time fair enough to maintain a decent profit margin for the flipper.

Crowdfunding sites, such as Groundfloor and Small Change, can also be a good source of funding. US News and World Report recently published a list of the seven best crowdfunding sites for real estate, which can be found at https://money.usnews.com/investing/real-estate-investments/slideshows/best-real-estate-crowdfunding-platforms?slide=7.

Tapping the equity in one’s own home is another method of financing a flip, but the choice comes with the ultimate risk that one could lose their home if the plan goes awry and the loan cannot be paid off as planned.

How popular is flipping? According to the folks at Attom Data Solutions, curator of the nation’s premier property database, 53,621 single-family homes and condos were flipped during the second quarter of this year (https://www.attomdata.com/news/most-recent/attom-data-solutions-q2-2020-u-s-home-flipping-report/). The number represented 7.5 percent of all home sales nationwide and was the largest percentage of sales reported since 2010. The report also noted that the average flipper made a profit of $67,902, which represented a 41.3 percent return on investment compared to the original acquisition price.

In the end, flipping a house can be beneficial to many. The flipper, investor and/or bank each make money, the homebuyer gets a clean and fresh turn-key home, and the neighborhood benefits from the rehabilitation of a blighted property that could have easily diminished values in the neighborhood.

See you at closing.

Gary Sandler is a full-time Realtor and president of Gary Sandler Inc., Realtors in Las Cruces. He loves to answer questions and can be reached at 575-642-2292 or Gary@GarySandler.com.

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