Believe it or not, running out of repair money is not the disaster you might fear. Certainly, you should be very careful in how you prepare your budgets and conserve money, that goes without saying. Sometimes, though, you will run into surprises that you just could not have anticipated. If you find yourself in such a situation, there are at least four different routes you can take.
The first route, which is the most desirable one, is to discuss the change in events with your lender. Be sure you do it as soon as it looks like you might have problems, rather than waiting until you have put yourself even deeper in debt. Bankers are generally very organized people who like to plan their affairs. At the same time, they also know that nothing is ever a guaranteed sure thing and that there are risks involved in every project. The trick is to let your lender know there has been a surprise, and then give him or her enough time to digest the information, consider all his or her alternatives, and work with you to come up with a plan to work through the problem. None of us make our best decisions under extreme pressure at the last minute. If you avoid talking to your banker and put off the conversation until you have completely run out of money, owe money to subcontractors, and cannot make your next interest payment to the bank, then you might not be happy with the final solution your lender comes up with.
By talking about your potential financial problems at the very first sign of trouble, this demonstrates to your lender that you are a prudent business person and someone likely to successfully overcome temporary setbacks. Estimate the additional money and time you think will be necessary to complete the job. Be realistic and even a bit conservative in your estimate. This is no time to be wildly optimistic and then have to go back to your lender again in a few months for even more money. Request the additional loan money upfront to meet your needs. If necessary, offer to drop the asking price when you are ready to sell so the house will sell more quickly. This tells your lender that you are willing to personally take a smaller profit, or even just break even, if the lender will assume more risk by loaning you more money.
The second route you might be able to take is to find a partner who can inject some cash into the project. This rarely works out for people, so do not put this strategy high on your list. A partner who comes in at the last minute to save your project when you break the budget usually wants all of the profit when the house ultimately sells. Even on those terms, it is difficult to find an investor on short notice when you are also dealing with the emotional and economic pressures of running out of money. If you do find someone, you will spend several more weeks or months completing the project and working for free. There is no pot of gold at the end of the rainbow if you have to give away all of your potential profits just to prevent a foreclosure. You would probably be better off selling your home to another flipper, taking your losses, and getting on with life.
The third route you can take to get out of your predicament is to sell the house to another flipper. While they will ultimately make the profit you intended to earn yourself, you will have escaped from the project, will not have lost any money, and can spend your time on another project that has a greater potential of turning a profit for you. In business, it is important to know when to take your losses.
The fourth strategy involves believing in yourself, and requires good salesmanship and the ability to put a positive spin on anything. Here is how it works.
Let us assume that your first business plan called for $35,000 worth of repairs that would result in a home that was move-in ready and could sell for a $50,000 profit. After spending about $15,000 on unforeseen structural problems related to an old roof leak and a lot of rotten wood, you see that you cannot complete the house according to your original plan. Instead, you can spend your remaining $20,000 on life, safety, and comfort items, such as heating and air conditioning, working electricity and plumbing, and doors and windows that can be secured. Next, make sure there is at least one working bathroom, a sink and working plumbing in the kitchen, and the necessary electrical outlets for a stove and a refrigerator. In most cities, these are the minimum elements necessary to obtain a certificate of occupancy (C/O). If you have any money left, fix up the entryway and the landscaping to make a good first impression.
With your certificate of occupancy, someone can now legally live in the property while he or she completes the other repairs and remodeling. Once you obtain a certificate of occupancy, you will be able to sell the house, even though it will bring in less amount of money. Likely candidates include homebuyers on limited budgets but who are handy and can do their own finishing work. This target market is small, but it is very focused. Few houses on the market will meet their needs, but your house can be one of the few that would be desirable and attainable for these buyers.
In the same vein, do not discount the idea of putting a positive spin on your problem and still making a large profit. Once you discover and repair all the surprises, you now have a house with no surprises for the next owner. This can be worth a lot to potential buyers who have a desire to remodel and customize their perfect home but are not do-it-yourselfers. These people do not want to buy a house stamped with your idea of kitchen layout, plumbing fixtures, paint color, and wallpaper patterns. They do not want to spend time and money ripping out everything you did, just so they can do it all over again their way. You should paint all the walls white, leave clean but unfinished floors, and install very plain and inexpensive light fixtures. Then obtain a very detailed inspection report that you can show it to prospective purchasers.
Once you do this, you can market your home as being in “perfect condition, but ready to re-decorate and customize.” Sell it as is, or offer to customize the home according to the buyer’s specifications. Establish a budget for meeting the specifications, require the buyer to pay for all labor and materials, obtain a fairly large earnest money check, and set a closing date a few days after completion of all work. You can potentially still make your original profit, and perhaps even more. Custom homes always cost more per square foot than what are called spec homes, or a home that is completed by a builder with standardized finishes and details, and then sold to someone else.
The trick to overcoming possibly disastrous surprises is to plan for their possibility in advance. If you anticipate problems and allow for the possibility they might happen, you will not be shocked into paralysis if they do come about. People who have contingency plans prepared ahead of time generally have very creative solutions and good plans. When you are in the middle of a crisis, you will not have the time or the patience to start thinking of legitimate solutions. Follow your predetermined plans, stay calm, and everything will usually work out fine.