HOW DO I GET A FIX AND FLIP LOAN?
What is a Fix and Flip Loan?
A fix and flip loan is a short-term loan used to acquire a one-to-four family dwelling and then to renovate it in anticipation of an immediate sale. I hate that term, one-to-four family dwelling. Guys, we are simply talking about houses, condo’s, duplexes, tri-plexes, and four-plexes. The vast majority of all fix and flip loans are made to fix up regular, ole' single family residences.
For example, Tom Investor might buy a rundown old house in a nice area for $100,000 and then spend $60,000 renovating and updating it. The fix and flip lender loans him 85% of the dough he needs to buy the property and 100% of the dough he needs to fix it up. Four months later he might sell it for $220,000. Smart fix and flippers can make some serious money.
Who Makes Fix and Flip Loans?
In theory your own bank could make you a fix and flip loan; but banks are so incredibly slow that your target property would be LONG gone before a bank ever got around to approving your loan. Therefore the vast majority of all fix and flip loans are made by private lenders, also known as hard money brokers. You can apply for a fix and flip loan by clicking on the gray button below.
Can I Qualify for a Fix and Flip Loan?
Because fix and flip loans are made by hard money brokers, like Blackburne & Sons, as opposed to by commercial banks, it is somewhat easier to qualify for a fix and flip loan. You generally need a credit score of at least 620, although that number is NOT written in stone. For example, suppose you were a home builder in 2008 and got caught with 17 unsold spec homes just as the Great Recession crashed onto the economy. Your experience in new home construction should easily put you over the top. Here’s another example: Let’s suppose you have already successfully flipped three houses, but your credit score is still just 590. The chances are that your experience in home flipping will allow you to get approved.
No matter your credit score, you will need a certain amount of dough, what fix and flip lenders call skin in the game. That magic number is 15% to 20% of the purchase price of the rundown home. The higher your credit score, the lower your required downpayment. For example, if you are a pretty strong borrower and you are buying the home for $200,000 - before any renovations - you will be required by 99% of all fix and flip lenders to contribute at least $30,000 in cash (15%) to the deal. After that the lender might be happy to loan you the remaining 85% of the purchase price ($170,000) plus another, say, $90,000 to fix up the property.
Occasionally, you can pledge equity in another property as your downpayment. For example, let’s suppose you own your own real estate office worth $500,000 and your first mortgage is only $275,000. You might be able to provide a second mortgage on your office building as additional collateral to your fix and flip lender in lieu of, say, a $30,000 cash down payment. My own hard money shop, Blackburne & Sons, would definitely consider such a structure.
Do I Have To Make Monthly Payments on My Fix and Flip Loan?
Yes. Fix and flip loans are interest-only loans that require monthly payments. If you have a good job or a series of rental properties paying you a nice income, most fix and flip lenders will NOT require an interest reserve; otherwise, your fix and flip lender may require a four-month interest reserve. The good news is that your hard money lender will probably be willing to build in this interest reserve right into your construction budget; i.e., he will lend you 80% to 85% of the purchase price of the property plus 100% of the cost of the renovations plus a four-month interest reserve. Helluva deal.
Understanding the After Repair Value (“ARV”)
Every hard money broker making fix and flip loans will ask his residential appraiser to arrive at two different values - the As Is Value and the After Repair Value (“ARV”). Before arriving at an ARV, the appraiser will ask the renovator for his Scope of Work, which will detail exactly what repairs will be made and what materials will be used. The appraiser will then produce an appraisal with the two different values.
What is the Maximum Loan-to-Value Ratio?
The highest any fix and flip lender will go, absent additional collateral, is 80% to 85% of the purchase price of the rundown house (the As Is Value) and 70% of the After Repair Value. Some fix and flip lenders will only go 65% of the ARV, although Blackburne & Sons is comfortable at 70% of ARV. The good news is that most fix and flip deals end up satisfying the 70% of ARV Rule. Hooray!
What is the Interest Rate on Fix and Flip Loans?
It depends on the region in which your property is located. In California and near New York City (prime areas), you can get a fix and flip loan for as low as 9%, and sometimes even as low as 8.5% on a perfect deal with a clean, strong, and experienced renovator.
In the nice residential suburbs of football team cities, you will will likely pay 10%. Everywhere else you will likely pay 12% (maybe 11%). In truth, however, your interest rate really doesn’t matter that much. You will probably only keep your fix and flip loan for three to four months.
How Many Points Will I Have to Pay?
Once again, it depends on your region. In California and near New York City, the market for fix and flip loans is 1.5 points. Remember, the loan sizes in California and near New York City are typically pretty large. In the Midwest, where the loan sizes are often less $200,000, you will pay 3 points.
What is the Term of a Fix and Flip Loan?
Is There a Prepayment Penalty?
Will I Have to Personally Guarantee the Loan?
Who Does the Appraisal?
You should NOT order the appraisal yourself. Your hard money broker will order the appraisal, usually through Appraisal Nation, the largest appraisal firm in the country and a firm which attaches their big E&O Insurance Policy to every appraisal. Many hard money brokers sell their fix and flip loans off in the secondary market to Wall Street investment banking firms, and loans with appraisals made by Appraisal Nation are much more marketable.
That being said, if you end up with an appraisal not ordered by Appraisal Nation, don’t panic. Many fix and flip lenders use software like HouseCanary.com, a property valuation software, to verify the accuracy of existing appraisals.
Will the Lender Just Give Me the Money To Make the Repairs?
No. The money will be released to you in a series of draws, often three. You will work with the appraiser to develop your Scope of Work and Draw Schedule. There is a modest fee for the property inspector to verify that the the work required before each draw is released has been completed.
From the Point of View of the Renovator, Are the Rewards Worth the Risks?
Capital from Wall Street is pouring into fix and flip loans. You’re are definitely swimming with the current at your back.
I have written two good blog articles about fix and flip loans that ideally you should study:
Okay, I Actually Need a Fix and Flip Loan Right Now. What Do I Do?
Or call one of our fix and flip loan officers:
George Blackburne, IV