A fix and flip loan is a type of hard money loan offered by a private lender or a group of the individual lender. It is the most popular source of funding among real estate professionals who want to invest in distressed properties. As the distressed property can be found at a cheaper price, investors quickly renovate them, relist them on the market, and sell them to earn the highest possible profit. This loan is secured by the real estate property (typically the property being rehabbed) that the borrower puts up as collateral.
Before we move forward to discuss the process of getting a fix and flip loan, we need to understand where to get that.
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Where can you find a fix and flip loan?
House flipping involves purchasing distressed and inexpensive homes, fixing them up, and finally selling them to earn more than you paid. Fixing and flipping homes can be a lucrative business, but it also involves some serious financial risk, especially for those who are new to this business.
You need a hefty amount of cash to make your place in this house-flipping real estate endeavour. If you are running out of cash, there are solutions to fund your financing needs. You can apply for a fix and flip loan from a hard money lender. While conventional banks do not offer loans on distressed property, hard money lenders can easily make the loan for house flipping.
With a simple online search, you can find a hard money lender. Once you search online, you will have a list of numerous hard money lenders with a specialization in fix and flip loans. Choosing one among them can be challenging. Select at least three hard money lenders by reviewing their online profiles. Ask other flippers if they have worked with them? If yes, how was their experience working with that hard money lender? Also, ask about turnaround, cost, fees, and responsiveness of that lender that you are considering. Answers to all these questions will help you choose the best one among them.
You can also get funds from a private lender who may be your friend, family member, or another individual who doesn’t have a lending business but agrees to finance your fix and flip project.
How to get a fix and flip ?
When you decide to apply for a fix and flip loan, there are many things to keep track of. While you might have gone through the lending process before purchasing a property, the fix and flip loan processes are somewhat different. However, the fix and flip loan application process differs by lender and loan type, but there are some general guidelines that the borrower must follow with every lender.
From gathering all the relevant documents to finally closing the loan, here is a step-by-step process you need to follow:
- Review your credit report – As a house flipper, lenders will likely consider your credit score while evaluating your loan application. Ideally, it would be best to have a score of 620 to qualify for a fix and flip loan.
- Save money for a down payment – You are not always required to make a down payment, but putting a down payment makes you more appealing to the lender. Save 20% to 25% of the property’s purchase price before applying for the fix and flip loan.
- Compare lenders – When you search for a fix and flip loan, compare lenders based on available loan amounts, terms, and annual percentage rates (APRs). If you have a low credit score or are an inexperienced house flipper, look for a lender with less rigorous lending standards.
- Gather necessary documentation – The eligibility for a fix and flip loan varies by lender and loan type. However, most of them require borrowers to provide copies of their personal and business tax returns for two years and at least a three-year record of business finances. Also, invest your time in compiling a business plan that presents the information regarding other outstanding business debts. Even if you have little experience as a house flipper, provide a document that outlines your previous success with fixing and flipping homes.
- Submit a formal application – Once you gather all the required documents, you can submit a loan application online, over the phone, or in person. The process of submitting and completing loan applications varies from lender to lender, so contact a lender representative to learn more about the next step.
Just like the application process varies from lender to lender, the amount of time for loan application approval and fund transfer varies by institution. However, some top lenders promise to approve the loan application and transfer the funds within seven business days.
Points that need to be considered before getting a fix and flip
Getting a fix and flip loan is easy as compared to other types of hard money loans, but it does not mean that the lender will approve the loan application and transfer the fund to anyone who wants to try flipping a house.
When you are ready to get started, consider the following points:
- Find a local lender – An experienced local lender can prove your true business partner. Local lenders have deep knowledge of the local real estate market, and they also understand the trends of the local market. You do not need to waste your valuable time educating them about the nearby property.
- Find a reliable lender – While emphasizing local lenders, try to find a lender with an excellent portfolio. The best way to find one is to get the recommendation of other local flippers who they work with. Find a lender who can be your financial partner, someone who can demonstrate their success and who had successful flips in their past.
- Specialization in fix and flip – Hard money lenders offer various types of hard money loans. Choose that lender who specializes in fix and flip loans.
- Ask about construction draws – The construction draws are the amount released from the approved loan amount to make payments for your house flipping work. It will help if you have a fast construction draw to clear the contractors’ payments and material supplies. finalizing your hard money lender, clear up all your doubts about construction draws, like how quickly they release funds for construction work.
- Count the cost – Before you approach a hard money lender for a fix and flip loan, you should know the amount you need for flipping the house. Fixing and flipping the house is not only about purchase and renovation costs. They carry some hidden expenses. You should have an idea of accurate estimates before you apply for a fix and flip loan. If you do not estimate how much cash you need, you will ask for an inaccurate amount that may slow down the entire renovation process. Also, this may lead you to unnecessary debt. You should clearly understand all expenses, fees, and terms prior to signing to get a fix and flip loan.
- Schedule the project – Prepare a detailed schedule to complete your house flipping project. Make a note and write down the work to be done, such as noting down the beginning and ending time of each stage and estimating the cost of each portion.
If you are an inexperienced house flipper, remember that many lenders you might approach do not work with inexperienced house flippers. If you want to work with them, you will have to prove that you have successfully flipped at least one home. Some lenders who work with new flippers charge higher interest rates and fees.
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