FINANCING FOR FLIPPING HOMES
Is It Possible To Get Financing to Flip a House or Do I Have To Pay All Cash?
Absolutely! There is a whole industry of lenders who specialize in the financing of fix and flip projects. In fact, fix and flip loans may be the easiest type of real estate loan in the country to get these days.
Here's something you have probably never considered. Fifteen years ago home building was one of the largest industries in America. Housing, directly or indirectly (furnishings, appliances, flooring, etc.), employed almost twenty percent of the work force of the country. Today you only occasionally will see vast tracts of new homes being constructed. Why? Tighter restrictions on bank lending certainly plays a big part, but consider the possibility that the world has discovered that fixing up older homes is cheaper and more efficient than building new homes from scratch. Hmmm.
So Where is This Industry That Finances the Flipping of Houses?
In theory, you could go to your bank for fix and flip financing. The problem is that most commercial banks process fix and fix loans much too slowly. Few home flippers would be able to stay in contract with the seller for the six weeks required to get a loan approval. A faster home flipper will have already snagged the deal. In real life most fix and flip loans are therefore funded by private money lenders. Even if you haven't found your target property, you should still complete our fix and flip loan mini-app below (the gray button) and start a conversation with one of our experienced loan officers. They are a great resource. Our gray-button mini-app takes just 63 second. Really. Time it.
Will the Fix and Flip Lender Just Give Me the Renovation Money All At Once?
No, fix and flip loans are funded like construction loans. The home flipper will work with the appraiser to develop a Scope of Work contract, which will desbribe all of the work to be done to the house and will outline all of the materials to be used. The Holdback Agreement with your fix and flip lender will typically provide for several draws, typically three. When the fix and flip loan initially funds, the fix and flip lender will provide the home flipper, after his downpayment, with enough money to finish buying the home and enough money to complete about one-third of the improvements. After the first third of the renovations have been completed, the lender will release the second third of the money, and so on.
Does the Fix and Flip Lender Employ a Progress Inspector?
Just like in a construction loan, your fix and flip lender will require progress inspections. A progress inspection is a quick inspection by the lender's appraiser, construction engineer, or general contractor to make sure that the improvements called for in the scope of work contract have been completed in a workmanlike manner. Your fix and flip lender will normally schedule three progress inspections per fix and flip project. The cost per progress inspection varies between $300 to $400. When the inspector okays the work completed to date, your fix and flip lender will release your next draw.
What Is a Fix and Flip Loan?
A fix and flip loan is a short-term loan used to buy a house (or a condo, duplex, tri-plex, or four-plex) and then to renovate it in anticipation of an immediate sale. Most fix and flip loans are made to fix up single family residences.
Example: Steve Flipper might buy a neglected house in a nice area for $115,000 and then spend $50,000 renovating and updating it. The fix and flip lender loans him 80% of the dough he needs to buy the property and 100% of the capital he needs to fix it up. Four months later, Steve might sell it for $225,000. Experienced fix and flippers can make some serious money.
Will I Qualify for a Fix and Flip Loan?
Because fix and flip loans are made by private money lenders, like Blackburne & Sons Realty Capital Corporation (since 1980), as opposed to by commercial banks, it is pretty easy to qualify for a fix and flip loan. Generally you will 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 12 unsold spec homes when the Great Recession hit. Your experience in new home construction is a huge plus that will excuse a lower credit score. Here’s a second example: If you have successfully flipped three houses, you will probably qualify, even if your credit score is just 570. Fix and flip lenders greatly value fix and flip experience.
Even if you have superb credit, you will need a certain minimum amount of capital, what fix and flip lenders call skin in the game. That magic number is 15% to 25% of the purchase price of the rundown home. The higher your credit score, the lower your required downpayment. For example, if you are a clean, 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. The lender will probably be happy to loan you the remaining 85% of the purchase price ($170,000) plus another, say, $80,000 to fix up the property.
What if you don't have enough capital to get started? Occasionally, you can pledge equity in another property as your downpayment. For example, let’s suppose you own your own a small office building worth $550,000, and your first mortgage is only $285,000. You may 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 have interest-only monthly payments. If you have a good job or a series of rental properties that pay you a nice income, your fix and flip lenders will probably NOT require an interest reserve; otherwise, your fix and flip lender will require a four-month interest reserve. Surprisingly, however, your hard money lender might be willing to build in this interest reserve right into your construction budget; i.e., he will lend you 75% to 85% of the purchase price of the property plus 100% of the cost of the renovations plus a four-month interest reserve. This is a great deal.
Understanding the Repair Value (“ARV”)
All private money lender making fix and flip loans will ask their residential appraiser to arrive at two different values - the As Is Value and the After Repair Value (“ARV”). In order to arrive at an ARV, the appraiser will ask the renovator for his Scope of Work, which will describe what repairs will be made and what materials will be used. The appraiser will then finish an appraisal with the two different values.
What is the Maximum Loan-to-Value Ratio Based on the ARV?
The highest any fix and flip lender will go, absent additional collateral, is 75% to 85% of the purchase price of the worn out 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. Great news!
What Kind of Interest Rate Do Fix and Flip Lenders Charge?
A lot depends on where your property is located. In California, the greater suburbs of New York City, and the suburbs of Boston and Washington, D.C., you can get a fix and flip loan for as low as 8.5% to 9%, with a clean, strong, and experienced renovator.
In the desirable residential suburbs of football team cities, you will will likely pay 10% interest. Everywhere else you will likely pay 12% (maybe 11%). In reality, however, your interest rate really doesn’t matter very much. Most fix and flip loans pay off after only three to four months.
How Many Points Do Fix and Flip Lenders Charge?
Once again, it depends on your region. In California and near New York City, the market for fix and flip loans is just 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.
How Long is the Term of a Fix and Flip Loan?
Is There Any Prepayment Penalty?
Is a Personal Guaranty Required?
Who Orders the Appraisal?
You should NOT order the appraisal yourself. Every private money lender will want to order the appraisal himself, usually through Appraisal Nation, the largest appraisal firm in the country and a firm which attaches a $1 million E&O Insurance Policy to every appraisal. Many private money lenders these days 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 saleable.
If you end up with an appraisal not ordered by Appraisal Nation, please don’t panic. Many private money lenders use software like HouseCanary.com, a property valuation software, to verify the accuracy of existing appraisals.
More Information About Fix and Flip Loans
The article below will help a home flipper to negotiate a smaller downpayment requirement from his fix and flip lender:
How Much Cash Does a Home Flipper Need to Contribute to a Fix and Flip Deal?
I have also written two good blog articles about fix and flip loans that ideally you should study:
Fix and Flip Loans Are All the Rage
How Much Cash (Skin in the Game) Does a Fix and Flipper Need?
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