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VOL. 40 | NO. 21 | Friday, May 20, 2016

Want to flip? It takes money to enter this game

By Hollie Deese

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When it comes to buying a house to flip, there are a few options to come up with the money to finance it.

One of the most obvious ideas for first-timer flippers is to live in the home while doing renovations, which would then qualify the flipper for a traditional mortgage.

“Someone can owner-occupy something and fix it up, but that’s going to be a long process,” says David McKinney of The 404 Company in Gallatin. “Wendy (his wife) and I have rehabbed a few houses now on our own while we lived in them. But if you’re living in one, it’d be rather difficult to renovate it to that [great] extent and live in it.”

Especially since the home has to be in decent enough shape that a mortgage lender would actually pony up the money in the first place, which doesn’t leave a lot of wiggle room for renovations.

“It can’t be like a tear down or anything like that because no one’s going to lend you money,” says Wendy McKinney, who is also a mortgage loan processor at Acopia Home Loans.

“For instance, if it’s just a very dated house in a great neighborhood where it would really benefit from just being freshened, and totally updated as far as kitchen and bath, well in that case, you’d have to put down 25 percent to get a mortgage loan on it.

“Then, you’d have to have the cash reserve or be able to get an additional equity line on it in order to finance your renovations. It’s so not for the faint of heart because you could lose your savings so easily by making wrong decisions.”

Robert Coakley, president with the Real Estate Finance Group in Knoxville, says before 2008 you could walk in to a loan officer with a W-2 job, ask for $70,000 to flip a house and actually get the money.

Those days are over. If you want to get into real estate investments now, you need to have the cash on hand.

“You better have money if you’re going to play this game,” Coakley says. “No one wants to watch you fail at something you’ve never done before, especially a bank. There are better ways to make money.

“If you’ve got cash, you can make money in doing this. Don’t try to get in it and leverage yourself because one little hiccup – you’re upside down. If you have no loan on a property, you can have a hiccup because you don’t have a mortgage payment.”

Coakley says getting money for homes now is just like it was before subprime was invented – you have to qualify.

“You’ve got to have income, you’ve got to have assets to put down and you’ve got to be able to make the monthly payment,” he says. “That’s the whole new deal, proof or ability to repay. If you qualify it’s very simple. If you don’t, it’s not, or you’re not going to get a loan.”

It definitely helps expedite a flip if you are not living in it, but that requires a whole different kind of funding. That can be personal savings, a private investor or an established a line of credit. Not exactly easy money for newbie renovators.

“It is tough,” says David McKinney of securing a line of credit meant just for flips.

“The greatest problem is a lot of banks aren’t structured to lend for flipping homes. You can talk to loan officers, and they don’t necessarily tell you that upfront until you go through the process with them and then discover that they can’t do anything for you after all, but there are a few banks in the national market that understand it now.

After years of depending on private investors before he could build up sufficient financial records as a contractor, including annual financial statements and tax returns to warrant a lender loaning him the money, David McKinney recently secured a line of credit with Civic Bank in Williamson County, the money mainly provided by private capitals.

Securing a line of credit has allowed the McKinneys more flexibility in the number of projects they can take on at a time, increasing their ability to make money.

“Since I’ve established a credit line with a bank, we’re now to the point that we can keep three to four going and that’s been a recent development,” he says.

Knoxville real estate investor Chuck Ward operates with a combination of self-financing, private investments and bank credit lines. “Whatever it takes to make it work,” Ward explains.

Coakley says the best way to get financing for a flip these days is to get a line of credit on your existing home.

“Let’s say you have $100,000 in equity. Go into a bank and they might give you $80,000 in a line of credit,” he says. “Then you go out and find a $40,000 house. You draw $40,000 to pay cash for it.

“Whatever your renovation costs are, draw that off, sell the house, pay the loan back off. It’s like a big, fat credit card that you pay off at the end, hopefully in a short period of time.”

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