The Four Criteria For A Residential Back FlipTM Deal

real estate back flip checklist

real estate back flip checklist

Residential Back FlipTM deals are great because the homeowner actually gets to keep their property. Here are the four criteria we use when looking for potential Residential Back FlipTM deals.

1) The loan needs to be worth more than the house

2) The owner needs to be current on their payments

3) The loan needs to be a jumbo loan

4) The owner needs to be able to qualify for exit financing right away

Obviously we don’t want to ever buy a note without having a predetermined exit strategy in place. So what we do is we go in and we prequalify that owner for an exit loan. Typically we’ll do this at the same time we’re negotiating on the note buy because when we close on the note purchase from the lender, ideally we want to have that exit loan ready to go almost simultaneously.

Why Would A Lender Sell at a Discount?

You may be asking yourself  “Why would a lender agree to sell the note or to discount if they know that you’re just turning around and bringing in new financing.”

Well for one reason the current lender we’re buying the note from doesn’t need to know what we’re doing after we buy the note. The existing lender knows that we’re coming in cash and we’re buying the note. At that point we own the note. Once we own the debt we can do whatever the heck we want with it. We can foreclose if we want, we can work a new deal, we can do whatever we want.

So at that point we buy the note, the current lender then is out of the picture they’re done, they’re gone, and then what we do is we rework a new term with the owner. Our goal is to help the owner to refinance us out of the loan we’ve just bought so we’re going to reduce the owners debt down to an amount where we know we can get the owner refinanced.

Ideally we have gotten the owner already preapproved with a new lender for the exit loan.

What Makes The Residential Back FlipTM Work

What makes the Residential Back FlipTM work is the fact that you’re taking an upside down property where the existing owner owes more than the property is worth and coming up with a solution. The owner can’t refinance the property, they can’t sell the property, and they’re kind of stuck.

The reason the owner can’t sell it is because they would have to bring a couple of hundred thousand dollars or more to closing to sell the property. So we buy the note at a huge discount then we turn around and allow the owner to refinance the property based upon 75% to 80% of current market value.

You look at some of these Residential Back FlipTM deals where there’s a huge loan amount owed and when you see what we’re buying it for you might say “My goodness why would the lender ever take that?” Well the reason is in today’s market where real estate values have dropped the lenders they know that they can only get so much for a house that they get back as a result of a loan that went bad.

If the lender has to foreclose, if they have to take the property back, especially with all the requirements and hurdles that lenders have to go through to foreclose on a property these days, they know that’s going to take them time and it’s going to have costs.

So if a lender can get all cash from someone like us, one of the key things that make this business work is that lenders are under Federal guidelines which require them to have certain amounts of cash on hand. The amount of cash that they need to have on hand is tied in directly to the number of defaulted loans or troubled assets that the lender has.

So if a lender is not meeting their numbers, that is the Federal guidelines they are supposed to meet, and they’ve got a reporting period coming up, the people working for the lender start to get pretty nervous. They know that unless they get some more cash in the bank and get rid of some of these troubled assets then they may end up out on the street looking for a job.

The Feds Come In And Shut The Bank Down

What happens is the feds come in to the bank usually arriving on a Friday night. They shut the bank down overnight and the next morning it opens up – you’ve probably seen this before where a bank opens up and it’s got a tarp over the sign with the name of a new bank. The old bank has just been put into another bank. A lot of times this is because the bank wasn’t meeting the Federal guidelines.

The bank was getting into a risky situation where they had too many loans going bad and not enough cash on hand. So when we go in saying “Hey we’ve got all cash and we’d like to buy this note.” It can be attractive to the lender.

In most cases with a Residential Back FlipTM the note is not in default yet but it’s most likely going to be and if the lender needs cash that’s very attractive to the lender. Does this mean that they’re going to accept every one of these you put in front of them? Absolutely not.  But we have found that when you go in and you’ve got all cash to make these offers you can really make a killing on the ones that they do accept.

 

How We Discovered Commercial Back-FlipsTM

Commercial Backflip

Commercial Backflip

The Commercial Back-FlipTM is a new concept even though commercial lenders have been doing workouts on commercial properties for years. The difference is that in today’s distressed real estate market lenders are willing to take huge discounts in order to get out of commercial loans that are in default.

My business partner Jerry Norton came across our first commercial flip deal when he found a commercial property in a good location and realized that the property had a mortgage on it for $1.4 million in 2005.  He took control of the property by getting it under contract for $285,000.

Then here’s what he did next. He went and knocked on the door of the building next door to the commercial property that he just got under contract and said

“I’d like to talk to the owner… Hey I just bought the property next door and I’m interested in selling it.”

After a discussion that included a bit of back and forth on what a fair price would be, Jerry assigned his contract on the commercial office building for $350,000 dollars and was able to make $65,000 dollars on the deal with very little time or effort in it.

Then what happened next was that Jerry and I were doing a number of other real estate deals together and we started talking to the attorneys that were involved in that first commercial flip transaction.

The attorneys said to us “Hey we’ve got some other deals do you want to look at those?” And so we jumped in and looked at a number of other commercial workout deals that were in progress and that’s how we ended up falling into this whole commercial workout business.

The most common reaction when real estate investors hear about the Commercial Back-FlipTM is that it seems hard to believe…

Common questions we get all the time include:

Lenders will really take discounts that big?

It’s ok if the existing commercial property owner that is in default ends up getting their property back?

I don’t have to manage the property or find a new buyer?

I can make up to six figures on just one deal?

For some real estate investors the Commercial Back Flip TM seems too easy compared to traditional commercial real estate investing.

Most commercial real estate deals with an upside require a large down payment, usually thirty to forty percent of the purchase price. Then the existing property needs either additional capital to improve the property and increase the value, or you have to put in the time required to find commercial tenants and lease up the property.

With a Commercial Back Flip TM  you don’t have to put any money in the deal provided you have a company like Mentor Financial Group that can give you access to it’s money sources.  And because the existing commercial property owner is going to be keeping the property you don’t have to sell the property by going out and looking for a buyer.

On top of all this, when the deal closes all the pieces are in place already, so you won’t have to take on the risks that are normally associated with commercial real estate investing.

Who would have thought several years ago that it was even possible to do Commercial Back Flip TM  deals?

Why Commercial Lenders Are Willing To Dump Their Properties

back flip blueprint free courseOne recent change in the commercial real estate market is that commercial lenders are now suddenly willing to dump their properties or the loans they hold that are secured by commercial properties. The reason’s for this are varied, but it’s been coming for a long time since we’ve seen most commercial lenders over the past few years taking steps to avoid foreclosing on commercial property.

Many commercial property owners have either gotten the lender to accept interest only payments for a period of time, or in some cases commercial owners have simply stopped making payments on their commercial property only to see the lender delay the foreclosure process, offer to modify the payments, or be open to participating in a “workout” of the commercial loan.

The main reason for this is that if a commercial property is worth $2 million dollars right now when it’s occupied and well managed, if the lenders forecloses on a commercial property when they get it back it may very well be vacant and in need of repairs.  The lenders know that in most cases the property is going to be worth a lot less when they finally get it back after going all the way through the foreclosure process. That’s the number one reason why commercial lenders are willing to dump their properties, or discount the loans for much less than what they’re worth.

A couple of other factors can affect the way lenders make decisions on commercial properties that are in default. In one case that we were involved with recently, this particular loan was sold three times in a package from one lender to another before it was purchased by the existing lender.

Because notes like this are traded at a discount, if the total amount owed on the commercial note is $2 million, then chances are very good that the lender won’t have $2 million invested into the note, even thought that is the full amount owed by the commercial property owner. For all we know the lender may have invested something much closer to 40 to 50 percent of today’s property value which is the range that our offers to purchase commercial notes tend to come in at.

The third reason that lenders are willing to let commercial property notes go for big discounts is based on the decisions that are made in their board rooms, often when a reporting period or end of their fiscal year is looming.

This is because of federal lending guidelines that require them to meet certain ratios when they have nonperforming assets. Lenders are required to keep certain amounts of money on reserve due to the defaulting assets they have on their books. When you are working with a commercial lender who is trying to meet their numbers and they’re pushing up against the end of a fiscal year you can get some amazing deals.

So the big thing to remember in this distressed real estate market is that commercial lenders are running scared. They have gotten through the past few years by extending payments when commercial loans have come due and accepting interest only payments or allowing no payments at all to be made at times. When the commercial loan amount is much larger than the current property value we know that something is going to have to change in order to bring the market back into balance.

What’s happening is that commercial lenders are accepting all cash payoffs of existing commercial loans in order to clear the non-performing commercial real estate loans off their books. This gives the lender more cash on hand, which helps them to meet the federal lending guidelines and it also removes a non-performing asset, which also improves their position with the federal lending guidelines.

All of these reasons help to explain why right now is a great time to get commercial lenders to accept discounted payoffs, which is a key component to doing Commercial Back Flips TM.

3 Ways to Make Money Flipping Commercial Real Estate

There are three ways to make money flipping commercial real estate, wholesaling commercial deals, value add

Back Flip Blueprint

Back Flip Blueprint

commercial flips and the Commercial Back Flip TM.

To wholesale a commercial property all you need to do is find a screaming great deal, get it under contract and then assign your contract to another commercial real estate investor for a fee. The challenges with this method in this marketplace is in finding a buyer that is able to come up with conventional financing. One method that some savvy investors use is negotiating a commercial master lease purchase, or owner carry financing deal and then assigning their contract once the creative financing terms are in place.

The best Value Add Commercial Flips are done by finding a vacant commercial property, getting it under contract and then locating a suitable commercial tenant who is willing to sign lease with you, contingent upon your purchase of the commercial property. Then you can assign your contract on a property you negotiated a great deal on because it didn’t have any income coming in. With your new tenant the property now makes sense and thus is attractive to your new commercial real estate buyer.

The best method in this market seems to be the Commercial Back Flip TM. To do Commercial Back Flip TM deal you’ll look for a commercial property owner who is in default, not too hard to find in this real estate market. You can also look for commercial attorneys who specialize in helping commercial property owners who owe too much on their commercial buildings.

The Commercial Back Flip TM is typically structured like a 47 unit apartment building that we did recently. The apartment building was a 95% occupied building; it wasn’t distressed, it wasn’t run down, it was in tip-top shape and it was right next to a big university so they can keep it full pretty easily. So the commercial property was in a great location, and it was a great building.
The apartment building owner owed $1.2 million on this building and the bank was willing to let it go for $400,000. That price is, of course, way below what the building is worth in today’s market place. I am pretty conservative in my estimates, but I would put the value on this property at $950,000. In a good market it could be worth $1.3 to $1.5 million.

So if you could own that apartment building for $400,000, based on the net operating income that it’s currently bringing is, that’s a 25 cap rate. So why if the property is worth almost 1 million, will the bank take $400,000 for it? The reason is that if the bank has to go through and take that property back, they will spend a ton of money on legal fees, a commercial broker; and they will have to hire a property management company to manage the property. The property value will be diminished greatly by the time the lender gets it back.

So if you are thinking whether or not you should get into commercial real estate investing, that’s what’s so fun about flipping a deal. You are in and out and you are making your money right now, today. By doing Commercial Back Flips TM you can make some real quick money on these things.
The Commercial Back Flip TM is a cutting edge method and as of this writing, Peter Conti and Jerry Norton are the only ones who are sharing this information with other commercial real estate investors.

3 Ways to Make Money Flipping Commercial Real Estate