Flipping Distressed Properties: How a Colonial Hard Money Loan Can Help You Generate Tangible Returns

Early one morning, Jackie Sheely received a call informing her of distressed real estate in Tarrant County, TX. The property was a two-story, 2,100 square feet duplex (on a 7,080 square feet lot) located at 1914 Nolen Ct, Arlington TX 76012, and had four bedrooms and two bathrooms total (i.e.: two bedrooms and one bathroom in each unit). Jackie Sheely owned Rokajali TX LLC with Lillian Sheely and Katie Macperson. As a new real estate investment venture, the company was smartly buying properties with a bid to renovate them and put them back up for sale. The trio had performed fix-and-flips before using distressed real estate and had made good profits on these prior ventures. 

The owner had defaulted on the loan and the property would be seized by the bank in some time. The owner was in a difficult situation and Jackie knew that if they moved quickly, they could get their hands on a great opportunity. Time was of the essence, so the managing members visited the property later that day. They also got in touch with the bank that had originally given the loan for the property. They gathered as much information from them as possible. They could see that the area had a lot of growth potential. They met the owner to understand his situation and his monetary needs. After their research was done, they were convinced that it was worth buying the property. They could refurbish it and sell it at a premium.

Flipping Distressed Real Estate May Present a Great Opportunity 

Purchasing distressed real estate can offer a great opportunity, albeit with some caveats. Let’s first talk about the advantages. 

A distressed property has been seized by the bank or finance company to recover the loan unpaid by the owner. When a property owner defaults on his or her loan, the bank moves in to get hold of the property. After the foreclosure process, The bank then puts the said property up for sale, so they can recover money from the non-performing loan, in lieu of buying the property in the first place. 

The best part about buying a distressed property is that it is usually auctioned at a price lower than the market rate. The buyer of such a property can then make renovations which are much cheaper than building from scratch on a piece of vacant land.

If the property is located in an area with high growth potential, it comes with the advantage of an even higher potential profit once it has been renovated.

A Fix and Flip Loan May Help Leverage the Opportunity 

Rokajali approached Colonial Capital for a short-term hard money loan. 

Colonial Capital is a hard money lender based in Phoenix, Arizona, with over 75 years of experience in serving the real estate market. Founded in 2003, Colonial Capital provides short-term bridge loans secured by real estate, which makes it ideal for fix and flip investors to be able to buy distressed real estate and turn it into a profit. These kinds of loans usually create complications for traditional lenders. Colonial Capital’s leadership, vast experience, and expertise in serving the dynamic real estate market enable them to quickly quantify risk using market knowledge coupled with disciplined underwriting.

After a short meeting with Colonial Capital, the owners of Rokajali were satisfied with the deal they were getting – from loan amount to full point structure. A loan amount of $200,000 was offered to them with an 85% Loan-to-Cost (LTC). This was 85% of the $204,500 purchase price ($174,000), plus approx. 70% of the $36,800 renovation costs ($26,000). These loan terms worked perfectly for Jackie, Lillie & Katie. 

Rokajali could now use the loan amount to turn the fate of the property around by giving it the facelift it so desperately needed, considering the growth potential of the area. The façade was fixed, plumbing and electricals were sorted, and all the rooms were given a fresh insulation layer, as well as painted to make the occupants feel comfortable. After all these alterations were made (some significant and some cosmetic), it didn’t take Rokajali much time to find a new buyer. 

One month after the property went up for sale, they were able to refinance Colonial out of the deal. They have since tapped a successful property manager to facilitate renters and maintain the overall wellbeing of the property.

Rokajali’s premonition about the property turning a profit, and Colonial Capital’s expertise in looking through a property to find its true, unspoken value, helped to get a loan that was perfect to fix up the property and turn a huge profit on it.  

Be Mindful of Potential Drawbacks

However, all may not be as smooth sailing as this story makes it to be. Flipping a distressed property may not be everyone’s cup of tea, and it’s not necessary that you turn up a profit while flipping it. You also need to be strategic about distressed asset purchases and not just look at the headline numbers. 

A distressed property, if located in a good neighborhood, with some potential for growth may be easier to flip than one situated in a bad neighborhood. Without significant short-to-medium term potential, location can make it harder to flip the property within a reasonable timeframe. 

Apart from the neighborhood, you also have to be strategic with regard to renovations. In an effort to make the property sellable, you may overdo cosmetic renovations and end up spending more on them than is required. Do things that will tangibly add value. Can you add a bathroom or a drive-through? Renovations need to offer long-term value. 

Also, the condition of the property may be worse than you think, and value can be difficult for an appraiser to assess. It is therefore extremely important for the investor to assess both the property and the neighborhood before purchasing and trying to flip it. 

The onus, clearly, lies with the investor looking to flip the property to complete thorough due diligence of the property and the neighborhood, so that he or she can get a proper quote for the loan amount and that he’d be able to sell it off at a profit after flipping it. 

Parting Thoughts

All things considered, if you can carefully assess the distressed property after comprehensive due diligence, you can turn a profit on it. At Colonial Capital, we are here to help. We have in-house experts who can determine the current and future value of the property, and provide loan amounts that are closer to your expectations. And you are also mitigating your risk by getting the property through a Colonial loan instead of an outright purchase.

Help us help you in your journey to flip distressed property and turn them into a profitable opportunity. Contact us today. 

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