New Idea Needs Funding

**RKW34** · 02-11-2008 09:43 AM

I am new to the site. I have been researching a lot an I have just started putting together a plan. Have you ever seen or knew anyone flip a house? It takes a lot of money in most cases and does not always return what you want or an investor wants. I have a way to do the same only with a much smaller investment and a lot less risk. Not to mention being able to spread the risk out and still have the same kind of returns. I am looking for someone that would like to help me get started. I will explain everything in detail to anyone who is interested.

**OnTheWayUp** · 02-11-2008 10:03 AM

You might wanna say what your idea consists of in this thread. No one is going to take the extra step in contacting you to fund your idea, remember, you need them, but they don't need you.

**Galeano** · 02-11-2008 10:30 AM

i must agree with the firest response however you brought up a topic I'm really interested in.

Respond and give me more detail.

Thanks

**RKW34** · 02-11-2008 10:35 AM

I watched a house down the street start with a price tag of $220,000.00. It was on the market for about 6 months (odd in the area considering that the houses in the area have been on market for an average of 45 days). They dropped the price to $200,000.00. Another 6 months and they drop again. This continued to happen until the price was down to $150,000.00. Durring the time that this house was on the market 2 other houses on the same street sold for just under the asking price and in just a couple of months. The house is over 3000 sq ft has 5 bedrooms and a finished basement. On the outside the house is beutiful. I walked throurh the house with the owner just for fun and I wanted to know why this place was different. The kitchen was over twenty years old, the bathrooms were even uglier. I call a couple of friends and they came in and gave a price to make some much needed updates as her realestate agent also sugested. The difference I showed her that she could afford some upgrades. Long and short she made about $20,000.00 worth of changes and put the house back on the market at the original price and excepted an offer after 1 month for $195,000.00. So she spent $20,000.00 to raise her profit back up $45,000.00. After this I started looking into the Price Reduced signs and find the this is a common problem in realestate. Some of these houses are on the market for 2-3 tears or the seller even gives up. So the solution is to make the investment in the house for them so they can sell. A price is agreed upon and a lean placed against the property to ensure payment at closeing. Thus taking the same investment for one flip and spreading it out to 10 to 15 homes. Now there is research to be done and a search to ensure that there is no liens against the house that cause a loss of money, but the risk is lessoned by the fact that the investment for the same return is less.

**mattm85** · 02-11-2008 10:46 AM

interesting...

**BusinessAdviser** · 02-11-2008 12:34 PM

Ok, let me preface my comment by saying that I am in no way attempting to destroy your dream. I am simply offering candid advice in order to help you consider issues which you may face along the way.

That said, I see at least one glaring problem with this plan, and I'll try to walk you through my reasoning:

1. You are proposing to finance and perform the remodeling of homes prior to their sale for the purpose of increasing their sale price. You plan to profit from your work by collecting an agreed-upon amount of money at the time of sale, and in an effort to minimize the risk of failing to collect, you intend to assert a lien against the property for the amount owed under the contract.

2. Your prospective clients can be divided into one of two groups: (1) those facing foreclosure, and (2) those not facing foreclosure.

3. Those facing foreclosure are not concerned with maximizing the sale price of their property. Rather, they are concerned with finding a buyer as quickly as possible who is willing to offer the amount remaining on the loan plus a small amount extra so that the seller can try to make up a bit of the equity built up in the home. In this case, the seller doesn't have the luxury of time to wait for the remodeling and to hold out for a higher sale price. By that time, the property will have already been foreclosed on.

4. And from your point of view, you shouldn't want to touch these types of homes with a ten-foot pole anyway. Regardless of your lien, if the property forecloses, the first lienholder, the lender, will be the first to collect, and only if the property sells at foreclosure for a price that exceeds the amount of the first lien, any other liens preceding yours, AND ALSO your lien will you get paid. Thus, these types of homes are just too risky.

5. And now for the other group of prospective clients. These are the owners who have enough money that they are able to make their monthly mortgage payments without problems. While I think that some in this group might be interested in having some remodeling work done on their home prior to sale in order to increase the sale price and can afford it, I think you'd be much better off simply working as a contractor with the typical payments for such. Why? Because the name of the game is cash flow. Yeah, you can have a million dollars ready to come in as soon as some houses are sold, but that won't put food on the table tonight. See, if you finance the remodeling yourself and make payment dependent upon the sale of the home, then the homeowner has every incentive to jack the price of their home up to the point that it could sit on the market for years. This again provides great risk to you. Is this making sense?

6. As a result of this, your current plan, though well intended, seems to actually be much more risky than simply doing remodeling work as a typical contractor requiring payment according to industry standards.

Again, this is merely my opinion, but I hope that it provides some insight into or provokes some thought regarding problems that you may encounter in pursuing this strategy.

*Just as an aside, I recommend looking up the mechanics lien statute in your state, as you are often permitted to assert a lien against a property for which you are making improvements, regardless of what payment structure you have set up with the owner.

(Please, anyone else feel free to jump in and either correct me if I'm wrong or let me know that this seems line of reasoning makes sense.)

**OnTheWayUp** · 02-11-2008 01:25 PM

Yeah, what JMenq said!

Great post.

**RKW34** · 02-11-2008 01:27 PM

First thanks for the response.

I do think that you have missed something along the way. If you pick up a real estate magazine you will see price reduced on many of the homes. If you read the descriptions there is rarely one that says, many up dates, or new kitchen, or anything along those lines. These are the house that I speak of. They have been on the market for a year or two and have nothing structurally wrong with them. The homes are selling on both sides, but have had many updates over the last few years. These homes sell very quickly.

The idea is not to give an owner a reason to jack the price to the sky, but to give their home what it needs to sell so they can stop reducing the price. The price goes back to what it was originally listed for. The owner wins by actually being able to sell their home in a market where buyers want everything to be move in ready and are willing to pay for it.
Example:
House lists for $200.000.00 and the area is selling for that price.
Time goes on and the price is reduced to $150,000.00.
Investment made of $20,000.00 for say new kitchen and bathrooms.
House is returned to market at originally listed price of $200,000.00.
House sells now because it is what today’s buyers want.
Owner would keep the $150,000.00.
For the investment the owner is required to give anything over $150,000.00 for the investment.
This does not give them more money over the reduced price; it only helps them get their house sold quicker and with no more reductions.

At no time is this to help someone with a mortgage problem. If a house has been on the market for a year or two the owner is capable of making the payments. They most likely cannot afford to make the updates to the house.

**BusinessAdviser** · 02-11-2008 02:54 PM

Again, I'm not trying to ruin your dream; I'm just trying to offer a few thoughts to make you think and consider some problems into which you might run.

What will you do if you've sunk $20K and weeks of work into this $150K house, but it doesn't sell for the $200K at which it was originally listed and which you expected when you made the decision to pursue the project? Will the price be lowered, cutting into and possibly eliminating your profits, or will the price remain same, causing the house to stay on the market much longer and creating cash flow problems for you? I understand that you only plan to pursue projects that are sure-fire moneymakers, but don't we all? You have to assume that things aren't going to work out exactly as planned, because they rarely if ever do.

If the house has been reduced to $150K, the buyer expects to sell it at that price. What incentive does the buyer have to let you spend weeks remodeling the house while the buyer's family still lives there, to take the house off the market for those weeks and risk missing an opportunity, and to subject the property to a lien, all just to earn the same amount of money that the buyer expects to earn anyway? I understand that you think that it will sell faster, even at a higher price, with the renovations than at the lower price without the renovations, but the buyer doesn't see it like that. The buyer sees that the same money will come in either way, and one way is a lot less hassle. See where I'm going with this one?

**RKW34** · 02-11-2008 03:57 PM

I have no problem with any of what you write and I understand the problems with the idea. I know that it as not as simple as going out and doing this to the first house that has been reduced. I would not have posted if I was not looking for some criticism.

That said it is not a question of will it sell faster. It will take knowing the market and what is the true problems as to why the house has not sold. This is not something that will be easily done. Putting together the right people is key to making it happen. It is the same with finding property to flip. The market dictates what and where to work. The most important person in this or even just flipping a house is the agent that works for you. Do they know the market, have they been in the market for a enough time, have they been successful, and finally are they someone that can be trusted not to steer the car in the wrong direction. Thinking now about them that is an amazing return and it could be done to ensure that a certain profit is returned and anything extra stays in the sellers pockets. I will have to rethink that portion of the idea, I will agree with that. I do however feel that it is a sound idea, will work and has the potential to be very profitable. After trying to sell their house for a year or more I think the owner will be more receptive to the idea than you think.

**EasyAutoSales** · 02-11-2008 04:09 PM

Originally Posted by RKW34

Example:
House lists for $200.000.00 and the area is selling for that price.
Time goes on and the price is reduced to $150,000.00.
Investment made of $20,000.00 for say new kitchen and bathrooms.
House is returned to market at originally listed price of $200,000.00.
House sells now because it is what today’s buyers want.
Owner would keep the $150,000.00.
For the investment the owner is required to give anything over $150,000.00 for the investment.
This does not give them more money over the reduced price; it only helps them get their house sold quicker and with no more reductions.

At no time is this to help someone with a mortgage problem. If a house has been on the market for a year or two the owner is capable of making the payments. They most likely cannot afford to make the updates to the house.

I see a huge problem with your example. I understand updating my old house will allow me to get a higher value. So using your numbers, if I plan on putting in $20k of upgrades in hopes of selling it for $200k, why would I hire you and pay you $50k vs. hiring any other contractor who would be fine being paid $20k?

Also, if your contract states the owner gets to keep $150k from the sale, what's stopping them from hiring you to get the upgrades and continue to list their house for $150k after the upgrades?

With regards to houses being on the market... I wouldn't judge anyone's situation based on how long a house has been on the market. Even if a house has been on the market for months, it doesn't mean the owner is prepared to continue making payments on it for another few years.

- Wei

**BusinessAdviser** · 02-11-2008 11:43 PM

I wouldn't pursue this opportunitiy for the above reasons, and others, but I do wish you luck. One thought might be to give the owners a piece of the pie. It's the same theory as offering equity to employees - to give them a stake in the outcome, and thus induce them to help you achieve your desired results. Just a thought.

**GonnaBthere** · 02-14-2008 12:34 PM

i have to agree with jmeng. i can see where the idea of a profit comes in mind. but let me ask you, how much real estate or building experience do you have? i'm in the contracting business and do a lot of remodeling. it is very very unlikely that a remodel goes as planned.

so lets say you are going to invest 20k into a new kitchen and bathroom. what happens when you start to remove the old fixtures, walls and floors and you discover that the floor is rotted and needs to be replaced? Or perhaps the plumbing is old and certain pipes need to replaced? All that extra cost can add up really fast. In my experience, I've come up with a rule of thumb. Set your budget for a project. Then add AT LEAST 25%. Most likely it'll be more than that but at least you won't have as much cost to make up.

**entrepresooner** · 02-15-2008 07:03 PM

Just a thought. Couldn't you just put a clause into the remodel contract that if the house doesn't sell in 45, 60, or 90 days (whatever is appropriate) that they would have to pay for the services themselves. Or possibly begin making payments for the work until the property sells.

Also RKW you should look up Ron LeGrand's books. He has some good strategies for flipping a house without ever taking possession, and without any significant investment. Tons of people are doing this. Literally every "We Buy Ugly Houses." sign is following his strategy. He also has other methods all of which involve very little risk for you. All the risk is left on the seller, and the person who assumes the title from you.

**bruiser1972** · 02-15-2008 08:26 PM

I agree with you RKW, I have been quite successful with what you are considering. As with any investment there are risks. Many sellers spend thousands of dollars "staging" a house for quick sale, what you are planning to do brings much more value to the perspective buyers. Even with the current housing market, there are opportunities, kudos to you for finding the opportunity. Just make sure the deal makes sense, be realistic when evaluating your market. Good luck and keep me posted!
GRH