Creativity Part 2 | The art of the deal
Hey, guys. It's Mike, with House Flipping School. Welcome to the House Flipping School whiteboard. If you notice, I got a smile on my face. I want to share with you the little smiley guy up there, as well. My film crew, Ralph behind the scenes and Ryan, well they have not even heard of this deal yet.
This is one I have not shared with too many people, so I hope you enjoy it. What I'm calling this one is 'the art of the deal', because quite honestly, I didn't even set out initially to put this deal together in this fashion. It all kind of unfolded like this, and I had that kind of 'aha' moment myself on this one.
This is a deal we put together with a contractor partner. The arrangement I made with the contractor was that we were going to be 50/50 partners on the deal and we were going to split the profits at the end of the project. It was a contractor that did have some money, so he was able to fund his portion of the labor, and lay out some money for materials and supplies. Then we sold the property and we cashed out. We would deduct everything and basically split the profit 50/50.
I want to share with you how I put the financing together on this deal. I do a lot of private borrowing from private lenders that fund a lot of our deals, but we also do business with the banks. That's right, banks are lending. If you have decent credit and you have money coming in go talk to your local bank. I always recommend that, because you're going to get the lowest interest rate. If you can't get funding from the bank then you are going to deal with the private lender or you deal with a partner - who knows. That's a different video for another time.
Right now, I want to tell you how I funded this deal and how I was able to realize the profit on this deal before we ever sold the house. That's pretty cool, so pay attention. The purchase price of the house was $81,000. After talking with my banker, they decided that they could lend us the money on this project. You've got to realize, banks aren't doing 100% financing anymore, and in my position, I didn't need 100% financing.
We were able to put some cash into the deal, which we typically don't do for most of my deals. We like to leverage our money and continue to grow our business and do more and more deals. In this particular case, because the bank doesn't do 100% financing, I had to come up with $24,500 of the purchase price of $81,000; thus, leaving the bank to lend me $56,500 on the purchase price.
What the banks will do is 100% financing on the construction. On the construction side, we had estimated with the bank, around $50,500 for the construction side of this project. The bank note totals $107,000, which is the $56,500 for the purchase and $50,500 for the construction loan which gave me a total of $107,000.
At the closing, it would be really nice if they gave me all that money all at once, but they don't, and that is okay. You probably don't want it all at once anyway, especially if you're not good with managing money. We are good at managing money however, that doesn't matter in the eyes of the banks. The bank's going to release the money as you do the project. This project took us around 30 days, and we were able to get our disbursements pretty quickly because we really move through our projects quickly.
Let me explain how we were able to realize our profit before the sale of the property. The construction loan of $50,500 is money I'm receiving from the bank to do the construction. What did I say earlier? The arrangement I made with my contractor was I would secure and get the deal, put everything together, do all the paperwork, all the legal work with my attorneys and so forth, and he would basically run the project and supply materials at his cost, and pay for everything along the way.
Not every contractor can do that. Some can, but you don't know until you ask. This particular contractor might have been slow at the time and he was a friend of mine. It was a deal we could do together, so we did.
As this project gets completed, I have my bank come by. They do their inspections, then they release the funds to me. After about 30 days when the project is done, I had all that $50,500. I didn't go buy big screen TVs with it, buy a nice Corvette, or take a big vacation-it was sitting in my checking account safe and secure, and I had access to my profit before we sold the house. How cool is that?
Let me explain to you: We had the purchase price of $81,000, we had a bank loan of $107,000, and we had the construction loan of $50,500. $24,500, if you remember, was my cash, my deposit that I put into the deal. In the beginning, I did have to fund some cash into this deal, but after, I believe it was even the first disbursement because we got a lot of work done initially; we have the draw around $20,000 or $30,000 in our first disbursement. We only needed two disbursements on this. 2 weeks in we received half of it, and the other 2 weeks we got the rest of it.
Immediately, I'm able to fund the $24,500 back within 2 weeks. Technically, I did have some skin in the game, but for a very short amount of time. What does that leave me after I fund my initial $24,500? That leaves$26,000. That's not the profit I made on the project, but that's still $26,000 from the deal that I realized before we ever sold it.
Of course there's marketing time and closing time; the nice thing about this project is that we sold it the first week that we had it on the market, but it's still another 45 days before we closed and received the money. In essence, I received the funds a couple months before we ever closed. Of that $26,000, after the net profit of $45,000, which we made about $22,000 each on the project, so therefore, I got my profit and a little bit of extra money before we ever sold it.
I wanted to share that with you because that is just another creative way of how you can put together deals with a partner. Basically if you think about it, this was like a three-way partnership: My bank was a partner in lending us the money, my contractor was a partner in running the rehab project. I would love to tell you that I've done a lot of them like this, but I have not. It's just a matter of when I'm borrowing money from the bank or whether I'm using private funds, or what have you. I want to share this with you because it's just another way that you can put a deal together and help you make some money.
I hope you enjoyed that one. I hope it put a smile on your face. Maybe you can let me know when you put a deal together like that yourself. Again, it's Mike from House Flipping School. We'll see you soon.