Flipping a Single Family Home

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One of the secretaries at a law office in Rhode Island that I regularly use to acquire hard money, approached me one day. She claimed her father was recently re-married and his new wife missed her family in Atlanta. The newlyweds decided they would move to Atlanta as soon as possible. The secretary gave me the address of the property along with her dad's phone number.

I called him and made an appointment to see his home. After seeing the property then researching what similar properties in that particular neighborhood had recently sold for, it was my opinion the subject property could get as much as $200,000 if left on the market for a few months and with normal advertising. I told this to the owner, and he said he was willing to take $125,000 if we could close within 10 days.

I used a standard Rhode Island Purchase & Sales Agreement, contingent upon a title search (to make sure he owed less than $125,000 including whatever liens, restrictions, and lis pendants there may be on the deed. In addition, I gave the owner a small deposit to make the agreement legal.

The title search cost me a few hundred dollars and everything came back fine. I obtained a hard money loan from a private investor I regularly do business with, and we closed on this property in 8 days. The hard money loan was at 13% — interest only, plus 2 points to the lender at the back end (when I sold the property). At first glance, many people are reluctant doing business with hard money lenders due to the high interest rate they charge.

In reality, however, unless you have access to a decent amount of personal funds, hard money lenders are essential in this business. I could not have done this particular deal unless I had fast access to their cash. If your intention is to “flip” the property, as was my intention, paying 13%, or even more, for just a few months doesn't really add up to all that much money. If, however, you plan on keeping the property for a while, by all means re-finance it at your earliest opportunity once you own it.

Before buying the property I had the owner sign a paper acknowledging I made him aware that my opinion was his house could be worth as much as $200,000 but he suggested taking less in order to close immediately, and also without having to pay a Realtor a commission. In a deal such as this it's always an excellent idea having the seller sign that he was completely made aware of the situation. Remember, I was brought into this transaction by the secretary in the law office who trusted me to do right by her father.

I wouldn't want anybody at a later date saying that I, as a real estate professional, stole that house from a poor unsuspecting man, or that I took advantage of the situation in any way whatsoever. Yes, we're all looking to make a profit. But if we need resorting to cheating people out of their home, it's time we looked for another line of work.

At the first Open House the following weekend, I received an offer for $185,000 and I accepted it. After paying off the hard money lender along with a 2% commission to the Realtor who brought the eventual buyer to my Open House, a few hundred dollars for tax stamps (in Rhode Island tax stamps is a fancy way of saying a small sales tax when selling a property), I roughly netted about $52,000. I also gave the secretary in the law office an envelope with $2,000 cash. Maybe she'll tell others so they'll come to me with similar deals. So I actually netted about $50,000.

There are 2 major points here which I hope you'll benefit from. First, it's extremely important that everyone you come in contact with knows you're in the business of buying real estate. Naturally, you don't need being obnoxious about it, like getting a tattoo on your forehead, for example. But a quality business card to pass out isn't such a bad idea. And please don't use a flimsy tissue paper card generated from your home computer. If the secretary at my law office didn't know I bought real estate, I never would have known about this deal.

Secondly, the above story should clearly illustrate the importance of having at least one hard money lender you can rely on when you need them. Had I been unable to immediately put my hands on $125,000 to make the purchase, there wouldn't have been a purchase. At least not by me.

The more hard money lenders you have a relationship with, the better. A fair percentage of these hard money lenders are retired businessmen with a certain amount of cash they'd rather lend out at high interest rates, as opposed to putting their money in a bank at 5%. But once they have their cash temporarily lent out, they have nothing left to lend you. That's exactly why if you intend being a serious real estate buyer you need having more than one hard money lender at your fingertips.

Lee Abbott
Cumberland, RI

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Flipping a Single Family Home

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