Ep 12: The Three Numbers That Control Your Iowa Flip Loan

The Three Numbers That Control Your Iowa Flip Loan

 

[NEIL] Somebody sent us a deal a while back. Rehab budget, purchase price, after repair value, all right there on paper. Only problem? The after repair value was twenty-seven thousand dollars off before anyone caught it.

 

[MAGGIE] Twenty-seven thousand dollars, on paper, before a shovel ever hit dirt.

 

[NEIL] Ninety percent financing, one hundred percent of the rehab, none of it means a thing if that one number's wrong.

 

[MAGGIE] Welcome back to Flipping Iowa. I'm Maggie Monroe, here with Neil Timmins -- real estate investor, and the guy Iowa flippers call when they need a hard money loan actually funded.

 

[NEIL] That's the job.

 

[MAGGIE] I went deep on this one for the blog this week at littleguyloans.com, and it turned into the question I hear from readers more than almost anything else: what does loan to cost actually cover?

 

[NEIL] It's the first number everybody wants, and it's usually the one they misunderstand.

 

[MAGGIE] I noticed that too, going through the comments on it. Same confusion, over and over.

 

[NEIL] It's not a knock on anybody. Nobody teaches you this stuff in school. You learn it the first time you almost get it wrong.

 

[MAGGIE] So let's start there. What's the mistake you see most?

 

[NEIL] Most first-time borrowers get loan to cost wrong in one of two ways. Either they think we're funding everything, or they think loan to cost is the whole conversation and forget the after repair value cap sits right on top of it.

 

[MAGGIE] So walk me through it. What is loan to cost, exactly?

 

[NEIL] It's the percentage of your total project cost we'll finance. And total cost isn't just what you pay for the house. It's purchase price plus your rehab budget, added together.

 

[MAGGIE] And that's different from after repair value.

 

[NEIL] Completely different question. After repair value is what the property's worth once you're done. Loan to cost is what it costs you to get there. People mix those up constantly, and it's an expensive mix-up.

 

[MAGGIE] Give me a real number. What does ninety percent of purchase price actually look like on a deal?

 

[NEIL] Say you find a duplex in Beaverdale, listed at a hundred forty-five thousand dollars. We fund up to ninety percent of that purchase price. So you're looking at roughly a hundred thirty thousand five hundred dollars we'd put up toward buying it. The rest is yours to bring.

 

[MAGGIE] And that ninety percent -- is that fixed? Every deal gets exactly ninety percent?

 

[NEIL] It moves. A clean deal, a tight rehab scope, a sponsor with a track record, that sits closer to the top of the range. A first-time borrower, more moving pieces, it can land a little lower.

 

[MAGGIE] Give me the other end of that. What does it look like when somebody's still building that track record?

 

[NEIL] Take a smaller place out in Waukee. Investor's on their second deal, first one closed clean but it was a rental, not a flip. Purchase price is ninety-eight thousand dollars. We might land them closer to eighty-five percent instead of ninety on that one, just because we haven't seen a full flip cycle from them yet.

 

[MAGGIE] So the gap between eighty-five and ninety percent, on ninety-eight thousand dollars, that's real money out of their pocket.

 

[NEIL] About five thousand dollars difference, just in that example. It's not a penalty. It's us matching the risk to what we've actually seen. Close that deal clean, and the next one, the number moves back up.

 

[MAGGIE] So track record is its own kind of currency here.

 

[NEIL] It is. But that's only half the equation anyway.

 

[MAGGIE] Because rehab's funded separately.

 

[NEIL] Right, and this is where we actually differentiate ourselves from a lot of lenders out there. We'll fund up to one hundred percent of rehab costs. Not ninety, not eighty. Up to the whole rehab budget.

 

[MAGGIE] That's a big number. Why?

 

[NEIL] Because rehab is where most investors are actually cash-strapped. Nobody's short on the down payment and flush on contractor money. It's usually the other way around. So it doesn't help anybody if we're generous on purchase and stingy on rehab.

 

[MAGGIE] Does that come as one check at closing?

 

[NEIL] No, and that matters. It releases in draws, as work gets completed and verified. You're not fronting six figures of contractor costs before a wall comes down, and we're not funding work that hasn't happened yet.

 

[MAGGIE] Okay, so ninety percent of purchase, up to one hundred percent of rehab. That sounds like a lot of coverage.

 

[NEIL] It is. And here's the part that trips people up every single time. Even if both of those numbers pencil out fine on paper, neither one wins if it pushes past the after repair value cap. The max loan amount is capped at seventy percent of after repair value, and that cap controls over everything else.

 

[MAGGIE] Walk me through that with the Beaverdale duplex.

 

[NEIL] Say that duplex comes back with an after repair value of two hundred forty thousand dollars once the rehab's done. Seventy percent of that is a hundred sixty-eight thousand dollars. Now if your purchase price plus rehab totals a hundred eighty-five thousand dollars, the after repair value cap is what actually controls, not the ninety percent, not the rehab percentage. You'd need to bring more cash, or find a way to bring total cost down closer to that hundred sixty-eight thousand number.

 

[MAGGIE] So the biggest number on paper isn't always the number that matters.

 

[NEIL] Correct. It's whichever one's lowest -- purchase-side financing, rehab financing, or the after repair value cap. That's the one that actually controls your deal.

 

[MAGGIE] What should somebody pull together before they even call you?

 

[NEIL] Three things. Purchase price, confirmed against real comps, not just the list price somebody's asking. A real rehab budget, built line by line, not a round number somebody guessed at over coffee. And a conservative after repair value, pulled from comps that actually sold recently in that same neighborhood and condition. Not the best comp you can find. The honest one.

 

[MAGGIE] Because the honest comp is the one that keeps you out of trouble.

 

[NEIL] Every time. Run those three numbers yourself before you ever pick up the phone, and you'll know within minutes whether a deal actually works, before I have to tell you.

 

[MAGGIE] And once those three numbers actually work, how fast does this move? I know that's the other question people ask constantly.

 

[NEIL] Once we have real numbers, not guesses, we can get you an approval in twenty-four hours. And we can close in as little as five days if you need to move that fast.

 

[MAGGIE] Five days. That's not a typo for people driving right now.

 

[NEIL] It's not. But I'll say this -- speed only works in your favor if the numbers underneath it are actually solid. A fast close on a deal where the after repair value was never real just gets you into trouble faster.

 

[MAGGIE] So the math has to come first, the speed is what happens after.

 

[NEIL] Exactly backwards from how most first-timers think about it. They want the fast close and figure the math out later. Flip that order and you'll do a lot better.

 

[MAGGIE] You mentioned the honest comp keeps people out of trouble. Has that actually cost somebody, getting it wrong?

 

[NEIL] Happened not too long ago. Borrower sent us a deal, all the pieces there -- rehab budget, purchase price, after repair value. We started digging into their comps, and what we found was the property didn't have a basement.

 

[MAGGIE] And the comps did.

 

[NEIL] Every single one. All the comparables backing up their after repair value had basements. So we ran our own comps, using properties actually on slab or crawl space, matching the real property. And when we did that, the after repair value came in about twenty thousand dollars lower than what they'd submitted.

 

[MAGGIE] Twenty thousand dollars is not a rounding error.

 

[NEIL] Not even close. We told the borrower. The deal died about a month later.

 

[MAGGIE] That's a rough call to make.

 

[NEIL] It is, but here's the thing. The deal came back. Turned out they went back to the seller, walked them through the real story on value, and ended up with about a twenty-seven-thousand-dollar retrade on the property.

 

[MAGGIE] So catching the wrong number didn't kill the deal. It saved it.

 

[NEIL] That's exactly it. It pays to dig deep and understand what the real comparables actually are. We could make money either way as a lender, but that's not the goal. The goal's a repeat client. And repeat clients only come back if the deal was actually profitable for them.

 

[MAGGIE] So when you're running comps, a basement isn't a detail. It's the whole number.

 

[NEIL] A basement versus no basement can swing your after repair value by twenty thousand dollars, easy. Match your comps to your actual property, or the cap we talked about is built on a number that was never real to begin with.

 

[MAGGIE] And the borrower walked away better off for having heard the honest version.

 

[NEIL] Twenty-seven thousand dollars better off, and a seller who understood what they actually had. Nobody loses in that version except the wrong number.

 

[MAGGIE] Okay, objection time. Somebody listening is thinking, why wouldn't a lender just fund one hundred percent of everything and let me worry about the rest?

 

[NEIL] Because that's how you and the lender both end up upside down. If we fund past what a property's actually worth once it's fixed, and the market moves even a little, there's no room left. The cap protects the deal, not just us.

 

[MAGGIE] So if someone skips that step -- ignores a conservative after repair value, and just goes with whatever number gets them the biggest loan -- that's where the money goes. Has that actually happened, somebody chasing the bigger number instead of the honest one?

 

[NEIL] More than once. Somebody wants the deal to pencil so bad they use the best comp instead of the realistic one. Then the after repair value comes in low at the actual appraisal, and now they're short cash mid-rehab with a contractor waiting on a draw.

 

[MAGGIE] That sounds like the exact situation from the story you just told, if nobody had caught the basement issue.

 

[NEIL] That's precisely it. Same setup, different ending, depending on whether somebody actually checked the comps or just trusted the number on the page.

 

[MAGGIE] What about somebody who says their rehab budget is basically a guess right now, they'll figure out the real number once they're inside the walls?

 

[NEIL] I'd tell them to slow down before they write the offer. A guess isn't a budget. Get a contractor to actually walk the property and price it out. It costs you nothing, and it can save you from a deal that never should've worked in the first place.

 

[MAGGIE] Last one. What happens if the actual appraisal comes back different from the after repair value number everybody agreed on going in?

 

[NEIL] It happens more than people expect, and it's exactly why I tell people to run a conservative number up front, not an optimistic one. If your own estimate was already honest, an appraisal coming in close doesn't blow up your deal. If your estimate was optimistic to begin with, that's when the cap suddenly feels a lot tighter than you planned for.

 

[MAGGIE] So the conservative number isn't just caution. It's insurance against exactly that moment.

 

[NEIL] That's the whole point of it.

 

[MAGGIE] Before we wrap, you know we like to close things out with a little piece of Iowa history. Well, this one's actually bigger than Iowa, but it's a good one.

 

[NEIL] I like this one a lot, actually. So, August 24th, 1814. British troops marched into Washington and set the White House on fire.

 

[MAGGIE] I did not see that coming from a loan to cost episode.

 

[NEIL] Stay with me. Dolley Madison was already headed out the door, but she stopped just long enough to save the full-length portrait of George Washington before the whole place went up in flames.

 

[MAGGIE] She grabbed the art on her way out of a burning building.

 

[NEIL] She did. And James Madison never moved back in. He finished out his whole term somewhere else entirely. It took three years of rebuilding before James Monroe finally walked back through the door, in 1817.

 

[MAGGIE] Three years to rebuild the White House.

 

[NEIL] Three years. Worth remembering the next time your own rehab timeline feels like it's dragging. Even the biggest job in the country took longer than anybody wanted.

 

[MAGGIE] Okay, so if you're taking one thing from this episode, what is it?

 

[NEIL] Three numbers. Ninety percent of purchase, up to one hundred percent of rehab, and a max of seventy percent of after repair value. Whichever one's lowest is the one that actually controls your deal.

 

[MAGGIE] And pull real numbers before you call. Purchase price against real comps, a rehab budget built line by line, and an honest after repair value, not the best comp you can find.

 

[NEIL] Do that homework, and you'll know if a deal works before anybody has to tell you.

 

[MAGGIE] 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.