Ep 9: How Iowa Flippers Structure Deals With Zero Cash Down

Flipping Iowa

Episode Title: How Iowa Flippers Structure Deals With Zero Cash Down

 

[NEIL] Same bungalow, two different investors, six months apart. One of them closed with room to spare and never wrote a check for rehab. The other one was forty-six thousand dollars short before we ever got near a closing table.

[MAGGIE] Same house. Two completely different outcomes.

[NEIL] Same house. One number decided it, and it wasn't the purchase price.

 

[MAGGIE] Welcome back to Flipping Iowa. I'm Maggie Monroe, and I spent this week buried in loan structures for the blog over at littleguyloans.com, and the deeper I got, the more it came down to one phrase everybody keeps getting wrong.

[NEIL] Let me guess. No money down.

[MAGGIE] No money down.

[NEIL] Yeah, I hear that phrase probably three times a week. Usually from somebody who read it on a forum somewhere and thinks it means free money.

[MAGGIE] And sitting across from me, as always, is Neil Timmins, Iowa's hard money lender, the guy who actually has to say yes or no to these deals every single day.

[NEIL] Every single day. And no money down is one of those phrases that sounds like a hack. Like there's a secret door somewhere. There isn't a secret door. There's math, and there's structure, and most people skip past both.

[MAGGIE] So that's today. What no money down actually means, how investors really get there, and why one number decides the whole thing before you ever pick up the phone.

[NEIL] And I'll give you both versions of that bungalow I just mentioned. Same neighborhood, same rehab scope on paper, wildly different math underneath it.

[MAGGIE] I want both of those numbers. Let's get into it.

 

[MAGGIE] Okay, start me at the beginning. When somebody calls you and says they want to do a deal with no money down, what are they usually picturing?

[NEIL] They're picturing a loan that covers everything. Purchase price, closing costs, rehab, reserves, all of it, zero out of their own account. And I get why. Every other kind of lending they've dealt with, a car loan, a regular mortgage, the lender is the only party putting up money.

[MAGGIE] But hard money doesn't work that way.

[NEIL] It doesn't, and it's not supposed to. A hard money loan on its own almost never gets an investor to zero cash out of pocket. We'll cover a big chunk of the purchase price, we'll cover the rehab, but there's still a gap. Closing costs, reserves, whatever sits between what the loan covers and what the whole project actually costs.

[MAGGIE] So when somebody does pull off a true no money down deal, what actually changed?

[NEIL] What changed is they stopped thinking about it as one loan and started thinking about it as a structure. No money down isn't a loan product. Nobody hands you a hundred percent financing with no strings attached. It's what happens when you stack a second funding source underneath the hard money loan, so your own cash contribution shrinks down toward nothing.

[MAGGIE] So if someone's out there searching for a lender who'll just fund the whole thing themselves, that's the wrong search.

[NEIL] That's the wrong search. Nobody serious is doing that, and if somebody tells you they will, ask a lot of questions. The right search is, how do I fill the gap with something that isn't my own cash.

[MAGGIE] Why doesn't hard money work the way a regular mortgage does? People are used to putting three and a half percent down on an FHA loan and calling it a day.

[NEIL] Because a bank on a conventional loan has government backing behind a chunk of that risk, and they're underwriting a borrower who's going to live in the house and make payments for thirty years. I'm underwriting a short-term loan on a property that, right now, might not even be livable.

[MAGGIE] No insurance program standing behind you the way there is for them.

[NEIL] None. The collateral has to actually be worth what we say it's worth, and somebody has to have enough invested that they don't walk if the market dips two percent in the middle of the project.

[MAGGIE] So it's a completely different risk profile from the start.

[NEIL] Completely different. Which is exactly why "no money down" can't mean the same thing in hard money that it might mean somewhere else.

[MAGGIE] So let's talk about what actually fills that gap, because I know from the blog there's more than one way to do it.

[NEIL] There's three, really, that I see work over and over with Iowa investors.

 

[NEIL] First one is seller carry-back. The seller finances a slice of the purchase price themselves, sitting behind the hard money loan. I had a guy do this on a rental in Windsor Heights last year. Landlord was done, tired of managing tenants, didn't need all his equity at once for tax reasons. He carried twenty thousand dollars of the purchase price as a second position. My loan covered the rest plus rehab, and the buyer wrote a much smaller check than he ever expected to.

[MAGGIE] So that only works with a certain kind of seller.

[NEIL] Motivated sellers. Inherited properties, landlords exiting, estates settling. Somebody who doesn't need every dollar today and doesn't mind waiting on part of it.

[MAGGIE] What's the second one?

[NEIL] Gap funding from a private money partner. Somebody else, not the seller, brings the cash to close and takes a fixed return or a piece of the profit. This is the one I see most from investors who've got a track record but not a lot of liquid cash sitting in a checking account.

[MAGGIE] Where do people even find a gap partner?

[NEIL] Usually somebody they already know. A friend with capital who doesn't want to swing a hammer or manage a rehab crew. A family member. Sometimes another investor from a meetup who likes the deal but doesn't want the job of actually running it.

[MAGGIE] Does a gap partner usually want a set return, or a piece of the profit?

[NEIL] Depends on the relationship and the deal. I see it structured both ways. Sometimes it's a flat annualized rate, somewhere in the low double digits, paid back at the sale. Other times it's a straight split of net profit, maybe fifteen or twenty percent to the partner for fronting the cash to close. Either way, that agreement needs to be in writing before I'll count it as your second funding source, not a verbal understanding you'll sort out later.

[MAGGIE] And the third?

[NEIL] Cross-collateralizing equity you already have. If you own a property free and clear, or you've got real equity sitting in one, that equity can stand in for cash at closing instead of a check. Honestly, this is the one I bring up most when somebody insists on zero down and they don't have a seller or a partner lined up.

[MAGGIE] Does that always mean a second mortgage on the other property, or are there other ways to structure it?

[NEIL] Usually it's either a straight cross-collateral pledge, where I put a lien on both properties for the one loan, or the investor goes and pulls a line of credit against the free and clear property themselves and brings that as cash to closing. Functionally similar outcome, different paperwork. I've seen investors in Clive and Urbandale do it both ways depending on what their existing lender would allow.

 

[MAGGIE] So if someone skips that step, if they don't have equity anywhere and they don't have a seller or a partner lined up, is that where the deal just doesn't happen?

[NEIL] That's exactly where it falls apart. And that's a conversation I have probably every week. Somebody calls, usually a first-time borrower, and they've got this idea that hard money is a zero-down product for people without capital. I have to walk them back from that almost every time.

[MAGGIE] What do you tell them?

[NEIL] I tell them to think about it from my side of the table for a second. If a borrower puts nothing into a deal, I'm carrying all the risk. Something goes sideways, they walk away with nothing lost, and I'm the one holding the bag. Their upside is unlimited. My upside is a fixed interest rate. That's not a trade I'm going to make, and no serious hard money lender will either.

[MAGGIE] So the down payment isn't just a fee. It's doing something.

[NEIL] It's alignment. Skin in the game. When we underwrite a deal, two things move that number, the property itself and the borrower's track record. Strong comps, a conservative after repair value, that lowers the risk. A borrower who's closed a few of these before, that lowers it too. When both are solid, the down payment drops. When either one is thin, it goes up.

[MAGGIE] But you just said there's a real path to zero cash out of pocket.

[NEIL] There is, and it's the same one I mentioned a minute ago. It's not about convincing me to take on all the risk. It's about bringing collateral instead of cash. Equity somewhere else, pledged against this deal. I get the security I need, the borrower doesn't have to write a check. That's the actual path to no money down. It just runs through equity you've already built, not through asking me to skip underwriting.

 

[MAGGIE] Okay, we've got the three ways to fill the gap. Now walk me through the math, because I know this is where it gets real.

[NEIL] This is where it gets real, and it's one number that controls the whole thing. Maximum seventy percent of after repair value. That's the cap on the base hard money loan, no matter what the purchase price is, no matter what the rehab budget says.

[MAGGIE] Even if ninety percent of purchase and a hundred percent of rehab would add up to more than that?

[NEIL] Even then. Ninety percent of purchase and full rehab coverage are real numbers, but they're subordinate to that ceiling. And that ceiling is what decides whether there's any room left over for a second funding source at all.

[MAGGIE] Give me the bungalow. Both versions.

[NEIL] Beaverdale bungalow, listed at one hundred forty thousand dollars. Needs thirty-five thousand dollars in rehab. After repair value comes in at two hundred sixty thousand dollars.

[MAGGIE] So seventy percent of two hundred sixty thousand is...

[NEIL] One hundred eighty-two thousand dollars. That's the most the loan can go to, purchase plus rehab combined. Add up the actual cost, one forty plus thirty-five, that's one hundred seventy-five thousand dollars all in. One eighty-two covers one seventy-five with seven thousand dollars of room to spare.

[MAGGIE] So that seven thousand dollars is the room where a seller carry-back or a gap partner can actually fit.

[NEIL] Exactly. There's a real spread there. Somebody can step into that spread with a second position and the whole thing works.

[MAGGIE] Is that spread typical, or is Beaverdale kind of a best-case example?

[NEIL] It's a good example, not a rare one. I saw something similar out in Johnston last fall. Ranch house, purchase at one hundred sixty thousand dollars, rehab budget of twenty-five thousand, after repair value at two hundred sixty-eight thousand. Seventy percent of that is right around one hundred eighty-eight thousand. All-in cost was one hundred eighty-five thousand. Only a three thousand dollar spread, tighter than Beaverdale, but still enough. The investor's dad carried a small note behind my loan and the deal closed with almost nothing out of his own pocket.

[MAGGIE] So it doesn't have to be a huge spread, it just has to exist.

[NEIL] It just has to exist, and it has to be real, not optimistic. That's the whole game.

[MAGGIE] And the other version of the same house?

[NEIL] Same bungalow, but say the rehab actually needed sixty thousand dollars instead of thirty-five, and the after repair value only came in at two hundred twenty thousand, not two sixty.

[MAGGIE] Seventy percent of two hundred twenty is...

[NEIL] One hundred fifty-four thousand dollars. And the all-in cost is one forty plus sixty, two hundred thousand dollars. One hundred fifty-four thousand doesn't come close to covering two hundred thousand. You're forty-six thousand dollars short before you've even gone looking for a second funding source.

[MAGGIE] That's the number from the cold open.

[NEIL] That's it. And no amount of clever structuring fixes that gap. You can't stack a seller carry-back or a gap partner on top of a base loan that doesn't cover the base deal in the first place. The after repair value has to leave room, or none of the three structures matter.

[MAGGIE] Does that spread issue show up more in some neighborhoods than others?

[NEIL] I see it a lot on the south side, around South of Grand, where the bones of the block are strong but individual after repair values can be inconsistent block to block. I had an investor bring me a house down there last spring, similar numbers to the bad version of that bungalow.

[MAGGIE] What were his numbers?

[NEIL] Purchase and rehab penciled out to right around one hundred ninety thousand dollars, but the comps only supported an after repair value of two hundred fifteen thousand. Seventy percent of that is about one hundred fifty thousand. He was forty thousand dollars short and didn't have equity anywhere else to bring. That deal didn't happen, at least not that structure, not that price.

[MAGGIE] So the neighborhood itself can be part of what kills the spread.

[NEIL] The neighborhood, or just one house on a block that doesn't quite match its neighbors. That's exactly why I want real comps before anybody starts talking about how they're going to fund the gap.

 

[MAGGIE] So say the math does work, there's real room in there. What do you actually want to see before you'll let somebody stack a second funding source on top of your loan?

[NEIL] Three things. I want a clear, documented source for that second position. A signed seller carry-back agreement, a commitment letter from the gap partner, proof of equity if it's cross-collateral. I'm not taking somebody's word for it on a phone call.

[MAGGIE] What else?

[NEIL] A real scope of work. Not a rehab number somebody guessed at over coffee. An actual line-item budget that matches what the property needs.

[MAGGIE] And the third?

[NEIL] Some kind of track record, or at least a strong contractor relationship if they're newer to this. I've funded plenty of first-time flippers, but if I'm also being asked to trust a second lien holder I've never met, I want to know somebody in that deal has actually finished a project before.

[MAGGIE] Where does your loan sit compared to the seller's or the partner's position? Does that matter?

[NEIL] It matters a lot. My loan is always first lien. That's not negotiable on any deal I fund, no exceptions. Whoever's providing that second position, the seller or the gap partner, is subordinate to me. They get paid after I get paid if something goes wrong. That priority is what lets me even consider a stacked structure in the first place, because my position isn't diluted by however that second piece is arranged.

[MAGGIE] What happens if the rehab runs over budget after everything's already structured? Does the second position have to come up with more money too?

[NEIL] Usually not automatically, and that's exactly why the scope of work needs to be realistic going in, not optimistic. If a rehab genuinely overruns, that gap typically falls back on the borrower to solve, sometimes through reserves, sometimes by going back to whoever's in the second position and renegotiating. It's rarely automatic, and it's one more reason I push people to bring me a real number the first time instead of a hopeful one.

[MAGGIE] What happens if somebody shows up without any of that? Just a verbal handshake with a friend?

[NEIL] I slow the whole thing down. I've seen investors in Waukee and out in the Ankeny growth corridor try to move fast on a hot deal with nothing but a text message promising a second position. That's not something I can underwrite, and it's not something that protects the borrower either if the friend changes their mind two weeks into rehab.

 

[MAGGIE] Let's do the objection round, because I'd bet somebody listening right now is thinking it. What if the second position, the seller or the gap partner, backs out mid-project?

[NEIL] That's the right question, and it's exactly why the documentation matters so much upfront. A seller carry-back gets recorded just like any other lien. It's not a handshake. Same with a gap partner, there's a note, there's terms, it's in writing before we ever close.

[MAGGIE] So it's not something that can just evaporate halfway through the rehab.

[NEIL] It can't, not legally. Where I see problems is when somebody tries to skip that step. Verbal agreement with a buddy, nothing signed, figuring they'll paper it later. That's when a deal falls apart at the worst possible moment, usually right when a draw needs to go out and the contractor's waiting on a check.

[MAGGIE] What about the person who says stacking two funding sources just doubles your risk?

[NEIL] It's not doubling the risk, it's dividing the same risk between two capital sources instead of one. The property still only supports what it supports. The seventy percent after repair value cap doesn't move because there's a second position behind it. What changes is who's providing the capital underneath that cap.

[MAGGIE] Here's one I'd ask. If somebody pulls a line of credit against another property to bring cash to closing, is that really no money down, or is that just moving the debt somewhere else?

[NEIL] Fair question, and I'll be straight with you, it is moving the debt somewhere else. It's not free money by any definition. But from a cash-out-of-pocket standpoint at this specific closing, yes, it functions as no money down on this deal. The obligation just lives on a different property instead of coming out of a checking account. I think that's an honest distinction people should understand going in, not a trick.

[MAGGIE] And if somebody just doesn't have equity anywhere, doesn't know a seller who'll carry, doesn't have a gap partner lined up. Is no money down simply not available to them?

[NEIL] Not yet. And I'd rather tell somebody that straight than have them chase a structure that isn't there for them on this particular deal. Their path is usually to do a deal or two with real cash down first, build the track record and the equity, and then these structures open up on the next one.

[MAGGIE] So it's not really a starting strategy.

[NEIL] It's almost never a starting strategy. It's what becomes available once you've built something to stand on.

[MAGGIE] Last one. Does stacking a second funding source on top of your loan slow down how fast you can actually close?

[NEIL] Not if the documentation's ready when you bring me the deal. We still move fast, same-day decisions on most applications either way. What slows things down isn't the structure itself, it's showing up without the second position papered yet and trying to sort it out after we've already started underwriting the base loan.

 

[MAGGIE] Before we wrap, I want to do the thing we like closing every episode with, a little piece of Iowa history.

[NEIL] I like this part.

[MAGGIE] Iowa has produced exactly one president. Herbert Hoover, born August tenth, eighteen seventy-four, in West Branch.

[NEIL] Little town, not far from Iowa City.

[MAGGIE] Born in a two-room cottage his dad and grandfather built by hand. Fourteen by twenty feet. One room slept five people, the other one did triple duty as kitchen, dining room, and living room. The timber for it floated down the Mississippi and got hauled the last forty miles by ox team.

[NEIL] That's not a starter home, that's barely a home.

[MAGGIE] Hoover called that little house physical proof of the unbounded opportunity of American life. Which, for anybody standing in a run-down starter house right now wondering if it's worth the work, is a pretty good line to sit with.

[NEIL] Puts the whole equity conversation in perspective. People built something out of nothing in a fourteen by twenty foot cabin. We're arguing over spreadsheets on houses with actual foundations under them.

[MAGGIE] Fair point.

 

[MAGGIE] Okay, let's bring it home. Three things people should walk away with.

[NEIL] One, no money down isn't a loan product, it's a structure. Seller carry-back, gap funding, or cross-collateralizing equity you already have. Pick one of those, or you're not actually getting there.

[MAGGIE] Two.

[NEIL] Two, the seventy percent after repair value cap decides everything before you go looking for a second funding source. Run that math first, every time. If there's no spread, there's no structure that fixes it.

[MAGGIE] And three.

[NEIL] Three, the down payment isn't a hurdle I put in your way for fun. It's what aligns your risk with mine. If you don't have cash to bring, bring equity instead. That's the real path to zero down, not asking somebody to skip underwriting.

[MAGGIE] I love that this started as a math problem and ended up being about trust.

[NEIL] It usually does.

[MAGGIE] That's what we've got for you today. If you got something out of this one, share it with a friend, and be sure to subscribe so you don't miss the next one.

[NEIL] Appreciate you being here.

[MAGGIE] Catch you on the next episode.