The cost of waiting for finance in property flipping and development is much higher than you might think.
When it comes to securing capital, every day is critical for flippers and developers.
The old adage ‘you snooze, you lose’ is on point.
That’s because you risk losing not just money but goodwill and maybe the entire deal itself.
In the property flipping business, return on investment is king.
But ROI can be quickly eroded by delays.
Some delays, such as inclement weather, raw material shortages or local government approvals seem beyond your control but sometimes even they can be mitigated.
Others, like those associated with finance, are within your control.
If you are falling victim to them, you are working with the wrong lender.
The material cost of waiting for finance
Flippers and developers risk losing the property they intend to purchase while waiting for finance.
The real estate scene in California is red hot and awash with professional flippers and developers who know how to work the system.
Their first rule of thumb is having access to fast money when they need it.
It can literally be the difference between securing a property and missing out.
Most sellers won’t wait while you seek funding from a traditional source like a bank which can take up to a month.
Many of these properties are distressed and sold by banks or vendors who want or need money immediately.
That’s why you need a hard money lender you can trust who can finance your projects in this shortest possible time frame.
The monetary cost of waiting for finance
Let’s say you secure your desired property but have to wait one month for your hard money lender to release the funds.
Suddenly, you are facing the following costs:
- Loan servicing
- Insurance
- Property taxes
- Utilities
Imagine you purchase a $500,000 property with an LTV of 80%.
Hence the value of your loan is $400,000.
A hard money interest rate of 12% amounts to 1% monthly which equates to $4,000 per month.
Average homeowner’s insurance in California is $1800 or $150 per month.
Standard property tax is 1.25% on a $500,000 valuation which is $6,250 annually or $520.83 per month.
The cost of electricity and gas on a vacant or lightly used property may be $150 per month with another $150 outlay for water, sewage and trash.
Therefore, the monthly holding cost of the property is calculated as $4970.83.
How holding costs impact your ROI (Return on Investment)
Continuing to use the above scenario, let’s assume you spend $40,000 on renovating the property and sell it for $600,000.
Your total outlay is $144,970.83 ($100,000 downpayment, $40,000 renovations, $4970.83 holding costs)
Your net profit is the sale price less the purchase price, renovation, holding cost and selling cost.
Let’s say the selling price (agent’s fee and escrow) is 6% of the sale price or $36,000.
Hence your net profit is $600,000 – $500,000 purchase price – $40,000 renovations – $4970.83 holding costs – $36,000 selling cost which is a total of $19.029.17.
Therefore your ROI is $19,029.17 ÷ $144,970.83 or 13.13%!
Now, if you had secured immediate finance, you would have avoided those expensive holding costs.
So your profit becomes $24,000 and your total investment falls to $140,000.
Hence your ROI is now $24,000 ÷ $140,000 or 17.14%!
That’s an improvement on your ROI of more than 4%.
Conversely, if for whatever reason you encountered other delays and your holding costs blew out to two months, your ROI would fall to $14,058.34 ÷ 149,941.66 or 9.37%
Every month, every day is critical to maximizing your return on investment.
The problem with traditional lenders
Traditional lenders simply aren’t geared towards the needs of flippers and developers.
While their rates may be more attractive, their lending criteria is much stricter than private and hard money lenders.
They require a detailed and usually spotless credit history, evidence of income earned and waste precious time assessing your credentials.
They draw up loans over long periods of time such as 25 years and factor in huge penalties for early repayments.
In difficult economic times, they reduce their lending, making property development even harder.
Hard money lenders have no such qualms or conditions.
They are interested only in the size of your asset, the ARV (After Repair Value) of the property and your exit strategy.
They are built for speed, flexibility and risk mitigation.
The hidden cost of waiting for finance
Besides the material and monetary costs of waiting for finance, there are also a number of hidden costs.
These are costs that don’t hit you directly in the hip pocket at first but over time can prove even more expensive.
These include:
Missing seasonal market shifts – even a small delay can cost you dearly if you are on the back end of the curve.
Opportunity costs – missing out on other deals once you have committed on buying a property but remain in limbo, waiting for finance.
Damaged relationships – contractors or agents are less likely to work with you again if you have a history of holding up deals.
The need for speed
Time is money and even when financed, there are many ways experienced flippers reduce costly delays and maximize their ROI.
Choose areas wisely – invest in jurisdictions with faster, investor-friendly permitting rather than ones that have a history of red tape. Target zip codes with active buyer demand and high turnover rates.
Simple is better – Avoid houses with odd layouts, hillside properties or HOA (Homeowners Association) properties with strict rules that might dissuade buyers.
Pre-project planning – Establish your renovation plan and work with contractors before closing, securing bids and timelines before escrow. Use template designs for kitchen and bathroom updates to save significant time.
Use established teams – Work with contractors you know, trust and can rely upon. Offer them bonuses for completing work on time or ahead of schedule. Avoid hiring unknown entities just because they are the cheapest bidder.
Materials management – Pre-order materials sticking with stock items and avoiding ones on order. Use project management software such as Builder Trend or CoConstruct to track tasks and deliveries.
Exit strategies – Ensure you have a fast and reliable exit strategy as well as at least one back-up plan if things don’t go as expected.
Get funded … fast
The most successful flippers and developers follow a time-sensitive formula that produces renovated properties on time and on budget.
They understand the cost of waiting and strategically avoid having to pay for it.
But irrespective of how long you’ve been in the flipping business, it’s always nice to have a mentor by your side.
That’s where Equidy comes in.
Equidy are like a speed enabler.
They appreciate the time-sensitive nature of flipping and developing.
Their great strengths are on two fronts.
Firstly, they are a hard money lender who will finance flippers and developers in as little as 48 hours.
They stand by their core belief that anything is possible and they are determined to prove it every single day.
Even in challenging economic times, they love to reward entrepreneurship and strive to help their clients realize their wealth creation dreams.
Secondly, they have had an intimate and personal history with all aspects of property development in California for more than 40 years.
They work closely with their clients to ensure they maximize their leverage and return on investments without putting themselves at unnecessary financial risk.
They do this because they know the business inside out and advise their clients every step of the way to help them eliminate costly delays.
Equidy enjoys long and established relationships with serious investors, sellers and real estate professionals while leveraging their reputation and trust, using clear communication to minimise the risk to all parties.
Contact Equidy today to book your free strategy call.
