Hard money lending, residential RE flipping

[Korch]

Hey guys, looking for some opinions here.

An acquaintance of mine, is planning on starting an endeavor with hard money lenders who will loan her money to buy a home selected by a guy with a construction crew. The guy helping her choose the homes claims to have a lot of experience buying properties, fixing them up, and selling them for a profit. He currently has several construction teams and feels he makes more money selling out his services than flipping on his own. She has to put $5000 down on the first property and she’ll get 100% financed in subsequent transactions.

This seems a little shady to me. Since I think she fits the profile of someone who could get duped, I’m checking into this a little. Does the above fit the profile of legitimate enterprise?

[Misfire]

I wouldn't dream of taking up this offer.

[Korch]

That's my inclination as well. Is there zero chance this is legit? How exactly is she going to get screwed? I'm just concerned for this individual, but I don't want to tell her it's a scam if I don't have anything to really back it up with...

I'd apprciate any help you could provide me with.

[iruleyouhard2]

How could someone ever make more money doing the construction only compared to doing the whole thing themself? If they do all the work why wouldn't they want the part that she is going to get?

[MisterW]

I'm currently looking to purchase a house (I actually wrote an offer yesterday that got countered, and wrote an offer on a different house today), and when I was shopping around for mortgages, one of the banks I visited had a pamphlet describing exactly this situation, and yes, it is a scam.

I'm sorry I can't give you more details as I just skimmed the pamphlet when I was waiting for the lender, but I remember that the buyer ultimately ends up in a bad financial situation where s/he owns the home at a terrible loan rate and the scammer walks away with some money, while allocating all risk on the buyer.

One thing to think about is who is carrying all the risk and who is deferring the risk, and why. If the construction guy says that he "makes more money selling out his services than flipping on his own", then it would be impossible for the buyer to make money right? The flipper would have to pay the construction guy more money than would be made selling the place post-flip in order for that statement to be true.

[lgas]

Of course it's always possible that this is a scam, but there's nothing about it that really screams "scam". Hard money lenders exist and can be quite legit. Construction contractors that specialize in fixer upper flip deals exist and can be legit as well.

My roommates and I did a similar deal, but we just financed the house with traditional financing instead of using hard money because hard money is usually quite expensive. The contractor guy was a friend of one of my roommates. He found us the house, we bought it, he fixed it up, he found us a buyer, and we sold it. We paid him all costs plus time and a nice margin and pocketed the rest. I think we ended up making about 40% on our out-of-pocket money (downpayment on the loan + upfront costs).

The project didn't go as smoothly as we had hoped though. It was supposed to take a matter of weeks and instead took a matter of months. It went nearly 100% over budget. The only reason we still walked away with a nice profit was because we were anticipating a ludicrous profit if everything went smoothly.

My roommate did a subsequent deal with the same guy, which he is still stuck again. Again weeks have turned into months and this time those months have been some of the most brutal months in the real estate market in years. And the original margin he anticipated was much smaller than on the first deal we did, so there was much less room for mistakes. My guess is that he will end up losing $50k on the deal by the time all is said and done.

So... I guess what I am saying is that it may or may not be a scam, but even if it's not a scam, it can go badly. If your friend doesn't have a lot of knowledge and experience about what they are getting into, I would advise against it... and if they are going to do it, I would advise lots of research ahead of time.

[kjander]

This could very easily be a scam and could just as easily be a legit deal. I myself have baught and fixed up houses (I don't call them flips because I lived in them when I renovated) and I have also acted as the contractor on a flip. There are people out there that flip and invest in real estate and at the same time work in the business w/o investing). I have reasons for working on both ends that I am sure nobody cares about, but I am skeptical of his reasons. If they guy has so much experience and does it sucessfully why would he need your friend? That is the question I would ask.

Either way tell your friend to be careful. Out of curiosity where is this house and how is the real estate market? Right now seems like a pretty bad time to flip. With higher interest rates the market is dead in my area. I just hope your friend isn't dealing with a dreamer who has watched too many epesodes of "flip that house."

[Korch]

"The flipper would have to pay the construction guy more money than would be made selling the place post-flip in order for that statement to be true. "


If he can charge 40K and net 20K as profits, but only make 10K additional by taking on the risk to buy the property and fix it he is actually making more on the construction side. Of course he makes more if he does both, but the construction might be a better risk-reward investment for him.

[Colt McCoy]

Where is this, and how's the housing market there right now?

[Korch]

Thanks for the feedback guys. Smells like a scam, but could be legit so I won't go out of my way to interfere with it. I'm not close to this individual anyhow.

It's in the Philadelphia area, and although I'm not really following real estate I don't think the mkt is doing particularly well.