Today, Strategic Partner Travis Sperr of Renovo Financial joins me to talk about the financial aspects of a Fix and Flip in Aurora. Travis is a hard money lender who’s also an investor. He has a lot of experience doing his own fix and flips and has been a lender on thousands of these types of transactions.
- Listen to the podcast “#385: When Hard Money Lending Can Help You Profit on Your Fix and Flip” Denver Real Estate Investing Podcast
- Watch the YouTube video (at the bottom).
- Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.
Details of the Deal
This property is a newer single family home in southeast Aurora, built in the past 20 years. It has 4 bedrooms, 2.5 bathrooms, 2700 sqft, and a 2-car garage. The borrower was originally going to wholesale the property, but the buyer fell out at the last minute. He saw it was a good opportunity to do a Fix and Flip himself, so he decided to buy it. He needed to be able to close in 6 days because of the contract fallout, so he reached out to Travis.
This borrower is a licensed real estate agent who’s done a lot of deals—hundreds over the past 30 years. He’s very experienced, but only worked with national lenders before. He was excited to work with Travis because he wanted a lender he could meet in person and who knows the local market. While Renovo is a national company, they have a strong local presence.
In order to meet the closing deadline, they ordered a Broker Price Opinion (BPO) rather than a traditional appraisal. This is similar to an appraisal but uses an agent rather than a licensed appraiser to evaluate the property. The benefit to going this route is it comes back much faster than an appraisal.
Financing the Fix and Flip
From a high level, Renovo is able to do 90% Loan to Cost (LTC), or even up to 95% for the right borrower with a strong enough deal. In this transaction, though, they hit the Loan to Value (LTV) before hitting the LTC limit.
He bought the property for $535K and estimated $20K for repairs, putting him at $555K total. With 13% down, he was paying $60K. Renovo’s general pricing is between 1-2 points. Their interest rates are generally between 8%-upper 9%, depending on the borrower’s credit score and experience. This is very competitive for hard money lenders.
Turning the Project into Profit
The borrower just closed on the property a few weeks ago, and is getting started on the flip. He plans on doing light cosmetic repairs: paint, carpet, countertops, outside cleanup, and potentially new appliances. He estimates the project will take 45 days to complete. The $20K repair cost is a high estimate for the scope of work.
His plan is to sell the property for $650K when it’s complete. Taking out the costs to finance, closing costs, and other expenses, he’ll likely net $45K. While this may not seem like a ton of money, this is a simple deal for someone who does a lot of volume. A few of these a year is enough to make a comfortable living.
Overall, this is a low-risk project based on the location of the home, the price point, and the amount of work the property needs.
How Does Renovo Simplify the Draw Process?
Renovo offers a virtual draw process, streamlined via an iPhone app. Using this app, the borrower can schedule a time to set up a virtual meeting in which they walk the lender through the construction process. The lender is able to see exactly how the construction project is coming along and release funds as warranted.
Since everyone has a different need for capital, clients can set up the draw period to be as frequent as they need—weekly, bi-weekly, once a month, or upon completion of the work. The money is wired the next day. If the borrower isn’t able to set up the meeting themselves, it can be delegated to a project manager or even the contractor. The borrower is sent a DocuSign document so they know what they’re getting the money for.
Many people say they don’t like to do loans with draws because they don’t like to spend time on paperwork or wait for money. The virtual draw streamlines the process and saves borrowers from paying fees on money they’re not using.
Should Fix and Flippers Worry about Rising Interest Rates?
Travis spends a lot of time reading, and history shows that interest rates going up a couple of points won’t have a huge effect. The last time rates went up quickly, there was a lot more inventory than there is now. Even though inventory is up in Denver, it’s still significantly lower than it should be historically.
Recently, Travis asked an appraiser how rate-sensitive the purchase price was on a $3.5MM new build. The appraiser said that since three of the five comps were all purchased in cash, interest rates didn’t factor into the valuation. A buyer who can purchase a property with $3.5MM in cash can also finance a part of that purchase if needed.
The buyers most affected by rising interest rates are first time home buyers who might be squeezed out of the market if rates continue to climb. Otherwise, most buyers will simply be able to accept the higher rates over time.
Connect with Travis
If you’re interested in working with Travis on a hard money loan, reach out to schedule a call here. A 15-minute call detailing what you’ve accomplished and what you’re hoping to do will be enough to know if it makes sense to continue the conversation in person.
For any other questions, you can contact Travis by email: [email protected] or phone: 720-427-7117.