Everything You Need to Know About Fix and Flip Loans
Looking for a loan to fix your flip and sell it for a property? Short-term loans for flipping houses are easy to come by. In fact, you can obtain financing with fewer restrictions than traditional loans. We are talking about fix and flip loans, financing designed to fund your flipping business.
Want to learn more about fix and flip loans? Read on.
What Are Fix and Flip Loans?
Fix and flip loans are loans that flippers use to purchase undervalued properties, fix them and then sell them for a profit. Also known as rehab loans, these are short-term high-interest loans that cover the cost of purchasing the property, and renovations.
As a subset of bridge loans, fix and flip loans make it possible to buy fixer-upper properties. Using contractors, you can make aesthetic improvements to the property making it possible to attract buyers.
Investors opt for fix and flip loans because they require less underwriting, unlike traditional loans. For this type of loan to work, the home’s purchase price should be no more than 70% to 90% of the after repair value less the cost of repairs.
Why Choose Fix and Flip Loans?
Fix and flip loans take a shorter time to have the loan approved. This is because lenders base their lending decision on the property’s value instead of the flipper‘s creditworthiness. Thanks to the significantly short time of approval, the real estate investor remains competitive.
Fix and flip loans are usually structured to fit the needs of real estate investors. How you may ask. The payback terms run between 6 to 18 months. This gives an investor the flexibility of purchasing a property, renovating it, and then selling it for profit. Thanks to the flexible period, a real estate investor can adjust to changes in the real estate market.
Lastly, there are fewer risks involved. This is because lenders usually hedge their risk through the property’s value. If a borrower is unable to pay the loan, they won’t lose their personal property. Instead, the lender will auction off the property.
How Much Fix and Flip Loan Do I Need?
The financing requirements for fix and flip loans differ from those of traditional loans such as mortgages. As aforementioned, lenders will fund fix and flip loans based on a property’s after repair value. As such, investors can finance up to 100% of your purchase price and repair costs instead of making a downpayment.
Traditionally, real estate investors follow the 70% rule when they want to figure out how much they need to fix and flip a home. Basically, the 70% rule states that a borrower should pay no more than 70% of the after repair value.
Let’s assume a flip is worth $200,000. As the flipper, you put in $25,000 worth of repairs. That means that you should not pay more than $122,500.
Here is how we came up with the figure.
Estimated ARV - Repair costs = 70% rule of the result = Maximum suggested purchase price.
($200,000 - $25,000) = ($175,000 X 70/100) = $122,500
Before purchasing any property for flipping, calculate your financing needs and loan options. This requires you to list all costs involved such as permits, new inspection fees, appraisal fees, acquisition costs, and more.
Are Fix and Flip Loans Similar to Hard Money Loans?
Both fix and flip loans and hard money loans are short-term financings with loan terms lasting between 0 to 36 months. The reason for this is that real estate investors have no intention of holding their flips for a long time. Instead, they’re interested in buying the distressed property cheap and quickly flipping it for a profit.
So, are fix and flip loans similar to hard money loans? No, this is because fix and flip loans will lend up to 100% of the purchase price while hard money loans only lend up to 65%. Also, fix and flip loans have a minimum FICO requirement and stringent restrictions. But hard money loans have less underwriting and fewer restrictions.
What Are the Pros and Cons of Fix and Flip Loans?
• Flexible loan terms
• Low-interest payments
• Competitive rates
• Quick Financing
• Less paperwork
• Short term
• High-interest rates
• Upfront cash for repairs and remodeling required
To find the right property, look for real estate-owned properties that fell into the hands of lenders after borrowers defaulted on their loans. You want to find the cheapest property in an expensive neighborhood, not an expensive house in a cheap neighborhood.
While creditworthiness is not a major requirement for fix and flip loans, having bad credit can make it difficult to receive funding. So, if you’ve bad credit, have equity in other properties, and demonstrate a successful house flipping experience. Lenders also require you to have substantial cash reserves.
Remember, evaluate the pros and cons plus examine the key factors before securing a fix and flip loan. At the end of the day, you want to sell your property at a profit not only to cover the expenses but to reward yourself for the effort and time invested.