The GURU On TV Said…
I know, I know, I know! The commercials all say that EVERYBODY can flip houses with no money! They play constantly on every channel. TV, radio, internet, everywhere. The problem is, they are trying to sell something. Is there a better way to sell than to make promises that they don’t have to keep?
Let’s consider this in greater detail. Real estate is not free. The seller (or their lenders) will not hand over the keys free and clear and walk away. If you don’t have the money, then you must find it somewhere.
Real estate is capital intensive. This is both good and bad. On the good side, a small percentage of a large amount can still be serious money (your profit). On the bad side, the exact opposite is true! Investors and lenders expect you to have a down payment (small percentage, serious money) to play this game. Your down payment reduces risk for them. This is the barrier to entry. They want you to agree to forfeit your money, and the property, in the event that the deal busts. Your money is their safety net! This is “having your own skin in the game”.
How Can You Flip Houses With No Money?
We have to get around the down payment to flip houses with no money. Unfortunately, that’s not all. The loan must be even more than the purchase price because it also includes closing costs, carrying costs, material costs, labor costs, permitting costs, property taxes and insurance, etc. You will have to find an investor(s) willing to cover the entire investment sum.
That is a big ask of any investor! Consider what happens if the deal busts! They are left holding the bag while you lose only the time you invested in the deal. Does that seem fair? Would you do it if you were the investor? These are the obstacles you have to overcome.
Find A Great Deal
The secret is really no secret. Buy low and sell high. Our suggestion is to be patient. Wait for a great deal with high return on investment and little required renovation. If you don’t find it this week then wait. New deals come around every week. Be smart about this. Recklessly pitching bad deals will keep investors from even taking your phone calls. When you call, you need to pitch a great deal!
Prepare To Ask For Financing
Do you have experience flipping properties? Are you networked well with investors, contractors, wholesalers, and real estate agents? Are you a capable contractor and/or real estate agent or wholesaler? If the answer is yes, then finding money will be much easier for you. If the answer is no, then please read How To Close Your New Investor. The post explains faking actual experience by using preparation.
You will have to convince investors to gamble on you. They have to think you are a low risk compared to the reward. They want you to know what you are doing already. You should not appear be learning as you go. You need a proven system with rounded edges and canned responses to most common problems. Spend the time to prepare a polished presentation of yourself ahead of your pitch.
Ok, now we have covered that we need both a great deal and a polished presentation. Now let’s take the next step. How to find the money.
Money Sources
There are three options we use to find money to flip houses.
- Make Your Own Investors for Flipping Houses
- Use Conventional Lending for Flipping Houses
- Use Hard Money Lending for Flipping Houses
Joint Venture
Ideally, you would Make Your Own Investors that could cover the entire investment sum. You could use the Investing Product, which creates a Joint Venture and security instrument. A Joint Venture is a temporary cooperative business arrangement entered into by two or more parties, which otherwise retain their distinct identities, for the purpose of completing a specific project. The specific project is your flip house!
This option will require you to be networked into your area. You will have to know people who can be your investors. This network is typically built over time and experience. This will be hard if every potential investor is brand new. You would normally convert investors one at a time over years.
Multiple Loans
If you can’t find enough money to cover the full investment among those you know, you will have to combine the methods above to collect the funds. You will need two separate loans. The first will likely be Hard Money, the second will be one of the other two options.
If you have equity in another property, then you could Use Conventional Lending to create a Home Equity Line Of Credit (HELOC) to collect the down payment.
If you don’t have personal equity, then you need to find secondary investors that are willing to make a risky loan. The loan will either be unsecured or have a security instrument(mortgage or deed of trust) in an inferior position. Explaining lien priority is beyond the scope of this post.
In a foreclosure, the superior lien does not have to repay the inferiors, but an inferior lien does have to repay the superiors to gain possession of the property. Think about if you personally paid the down payment. If the bank forecloses, do you get your down payment back? No you would not. That is the situation your secondary investors are in.
You could also use the Investing Product to collect the down payment. You could ask the seller for seller carryback financing. Alternatively, you could also collect from those you know(usually friends and family). Please remember, you are converting investors and placing them in a position that sophisticated investors would not enter. Scary village!
The secondary loan is more risky. It will cost more. Expect to pay a higher interest rate for the loan.
Should You Flip Houses With No Money?
Yes, you CAN flip properties without money, but success is not guaranteed! Flipping properties has many variables. Sometimes we do much better than our projections. However, sometimes we do much worse. Our system is designed to hit the projections on average. Let me tell you about two deals we did in the past.
Above Average Example
We sold a starter property in May 2010. At that time, there was an $8,000 first time buyers credit offered nationally that was set to expire in June 2010. The small incentive changed the market in a way we never predicted! We listed the home at $135,000. The neighbors all had very similar homes. They all told us we couldn’t get any more than our projected sales price of $120,000.
We sold that house for $145,000. The buyers were so eager to get something before the credit incentive ended that it created a short-lived buying frenzy!
Below Average Example
We sold another property located directly on a private golf course. Before we had finished renovation, the homeowners association gave notice that they sold the golf course to a developer. This notice made clear that the golf course would be closing. Afterwards, the homes directly on the course would have neighboring two-story houses very close to the property lines.
In that moment, we went from having one of the most desirable properties to one of the least! As a result, the entire neighborhood experienced a sharp and immediate decline in home values. Unfortunately, we missed our projection for that property.
Conclusion
The point is that some market factors are beyond our control. If we play the game without any safety net, then one bad deal could ruin us. The real question is, should you flip properties with no money even if you can? The risk is higher and the reward is lower. Big risk should promise big reward. That’s just good business.
If you are in this situation, our suggestion is to be very patient. You should consider becoming a real estate agent or wholesaling properties. Being an agent and wholesaling are mostly networking. These positions can help you build the network that you need to flip properties while allowing you to learn about the real estate industry. You will gain useful knowledge about which deals others will accept. This experience can be used later, when you make the transition to flipping your own properties.