House flipping is a very tricky business that usually requires a lot of brainpower to be executed correctly. It is when real estate agents purchase houses that need much work at lower rates renovate them and resell them at a higher price. The business format might entice you but has many risks for beginners.
Looking at last year’s situation, one must be aware of the market since there was a terrible decline due to COVID-19. However, several experts argue these statistics don’t hold much value. If you wish to go ahead and don’t have the right amount of money, loans are available. During Q2 of this year, i.e., right one, interest rates have been massively low, but they still require an eligible level of credit. Here’s how to get a fix and flip loans for beginners.
What is loan flipping?
Loan flipping occurs when lenders convince borrowers to refinance their mortgage by taking on a new, long-term, high-cost loan. Repeatedly refinancing a mortgage loan does not benefit the borrower.
Fix and flip loans with no money down.
Fix-and-flip loans are short-term loans given to real estate investors who purchase and improve a property (fix property—intent to renovate) and then sell it for a profit (flip). Usually, this renovation is minor, but it can also be a complete reconstruction of the home.
How much does it take to flip these homes?
Let’s be factual: buying a home for yourself and living in it is much cheaper than flipping homes for sale. These homes have many requirements, and apart from just getting yourself registered in exchange for money, there are many renovations. Property taxes, expenses for other utilities, and insurance from the start to the end when the house is sold are different costs.
Any short-term capital gains, usually 10-37%, will take a sliver of your profits, even if you flip these houses in under one year. It is nearly impossible to initiate this kind of business if you don’t have a sturdy investment. Unlike the earlier times when zero mortgage loans were a thing, today, regardless of whether you get a loan without a down payment, flipping home loans will be more expensive to return than the loan you’d take for your house.
Why are these loans on the pricey side? It’s the lenders who consider it as more of a riskier factor and have a lot of doubt about whether the returns will be coming or not. Another condition is that if you’re someone new to house flipping, several lenders will back out from giving you the funding for fix and flip. Usually, you must have at least one flipped house sold for profit and a good track record of repaying the loans to attain loans. Though several ones work with new flippers, there will be a high-interest rate.
What are hard money loans?
Hard money loans represent loans where the lender is an individual or company (not a bank), and funds are secured by real property. In this case, borrowers do not use traditional mortgage lenders.
Several experts claim this kind of loan comes with more complex terms and conditions and a high interest rate, whereas some disagree. On the other hand, some financers claim these are hard to finance only because these aren’t personal housing and are a bit unconventional to invest in. If you’re trying to get a loan, know that you’ll be able to get it for under a year, and the interest rates will vary between 12-18%, which is already pretty huge; not only that, around 2 to 5 points are also attested.
Each point sums up to a percent of the amount; therefore, if you take a $105,000 loan and just in case the lender charges an additional 3 points, you’ll be paying the interest rate+$3,150. The only good side of these loans is that they do not need to be paid as you spend the rest of the loan; you could pay it once the house is sold. Every lender considers the after-repair value and provides you with the money accordingly. So if you purchase the home at $75,000, and after the repairs, it’ll be worth $150,000, you could borrow up to 70% of the ARV amount.
Say you got a loan of $105,000. You could use that money for your other expenses after renovations (despite the fact if you convince the new homeowner to pay them), i.e., into marketing, commissions for real estate agents, etc. Once you manage all the expenses and fit them right under the amount you’ve got, you won’t ever need to get some money from your pocket to make this home brand new. Still, there aren’t too many benefits of this loan.
The after-paying points will take a big chunk of the profits you get after the home is sold, and let’s not forget the whopping interest rate that will blow out to be very expensive. But, if you complete the project in six months without spending a single penny from your account, the saved interest will automatically increase your profits. In simpler terms, you get a 45,000 dollar profit if the house sells for $150,000, and if it’s all done in 6 months, then at a 12% interest rate, you’ll only pay $6,300+$3,150 (interest charges) in an extra!
Conventional loans v/s Hard Money loans: What’s the difference?
Some investors feel getting hard money loans is easy as it keeps bureaucratic matters aside. Unlike the banks that provide conventional loans, the lenders don’t have to follow the regular protocols of the real estate agencies. An expert also claims that homes in poor condition always fail to get conventional loans, and hard money lenders majorly provide loans to houses in dire need of repair. These lenders decide based on the dealer’s reliability and potential profits in dwellings.
Therefore, if there is a more significant difference in the purchasing and selling costs, and the lender has established their fair share of the trust, they’ll instantly sign up for the loans, considering it a fair deal. Credit scores and debt-to-income ratios don’t hold much value in the case of hard money, and more of all, these qualifications have never even mattered. Though the need to submit tax returns, credit reports, and bank statements might be there, there isn’t anything related to the above. Also, they don’t have to worry if the down payment is borrowed!
This factor makes them highly different from conventional lenders. Even if the borrower fails to repay, the lender can take ownership of that house and sell it for their own profits. On the other hand, what makes them similar to conventional ones is that they’re the first in line to take authority of the home just in case one fails to repay and are mentioned in the paperwork, too.
Where could you find lenders?
There are several options for finding such lenders, one of which is online. The Internet is filled with any information you’re looking for; for instance, a company named Lima One Capital works with flippers who are new to the field and can provide 75% of the actual repair cost or 90% of loan-to-cost. Like every other lender, experience and past work will decrease the interest rate they’ve been charging. The fees and interest rates vary in every state, but they consider the credit score.
People wishing to get the money but having an interest rate under 680 will get a lesser amount at a higher rate. To attain a loan from their end, you must submit 10% of the down payment and repay them in 1 year+1 month. However, the hard money lenders for flipping houses are very strict with the timelines and repayment amount; hence, a borrower must be careful.
Another option could be LendingHome, as they offer loans for the entire cost of renovation and 90% of the purchase price. However, they require bank statements from newbies as proof that they can repay the loan and fulfill its requirements. In the case of old ones, the history of selling renovated houses, contract of purchase, documents of the property, and down payment will suffice.
Their interest rates vary from 3.875% to 6.50%, depending on whether it’s a rental project or a bridge loan. The company claims many loans are granted in as few as five days, considering the loan and zero application fee. The cost of closing would also not be more than $1,999.
Several experts also recommend connecting with real-estate associations, local investors, and real estate agents who are present in their very own city.
Who are private lenders?
Private lenders are those people who can grant you a substantial capital loan. They have a lot of savings and are looking forward to giving them as a loan, with similar terms to that of a hard-money lender, but at a comfortable interest rate. Also, they are much easier regarding negotiation, which stiff money lenders never do. You would also find this easier than flipping houses with hard money since they might take a partnership share in the project instead of taking an interest.
When dealing with an inexperienced flipper, one must be confident to negotiate in the most innovative way possible. Getting in touch with other flippers and knowing the average market rate is essential. There is no such thing that if the first deal with a lender didn’t work well, you wouldn’t get other opportunities. Know when you can walk away.
To find such private lenders, you need to join all the active real estate events in your city and network with them. These lenders charge between 8% to 12% of interest rate + a maximum of 2 points, whereas hard-money lenders charge 12% to 15% + between 2-5 points. They are similar to hard money and conventional lenders because they’re the first to acquire the house if the borrower fails to pay.
How do you find the right private lender?
Many masters of the field claim to identify suitable private lenders by connecting with flippers with good experience. These flippers are widely available and nesting for events where you can discuss everything in detail. Do not forget to ask about the return period they were allowed, the professional nature of a lender, and the general interest rate they were charged. If you also find a few good ones while talking to them, you can take the numbers and contact them using these flippers’ references.
If it works well, that’s great, but the worst can only be that the deal doesn’t work out according to your desired amount of funding or interest rate. However, there are several points when an unplanned fee arrives via the lender during settling, or the lender might try to raise a legal issue to attain the house in their name. Therefore, always check these points before you finally go for a lender.
What about online private lenders?
Several times, private lenders aren’t full-time lenders but someone who comes under your knowledge and is willing to fund your house flip. On the other hand, several would consider themselves private lenders as they have private companies and are easy to find on the Internet. For example, a company based in Calabasas, California, Anchor Loans, provides funding to any property and has its services available across 48 states, but the interest rate might vary for every.
As per the company’s website description, a flipper can borrow up to 80% of the cost they predict of the home; the loans will be approved in 5-10 days, between $50,000 and $20 million. However, one must submit a down payment of at least 10% to 20%. In addition, to attain a loan, one must have a history of 5 flips in 18 months; if not that, then LLCs and qualified corporations will be successful.
Crowdfunding
Crowdfunding is basically a group of several people or companies coming together to fund a particular loan. Every lender who decides to invest in a loan with a share of the money earns interest on that amount. Though old and traditional funding sites like Prosper don’t tend to invest in house flips, even if they do, they’re willing to sanction a maximum of $40,000 for renovations, small businesses, and debt repayments.
However, several websites dedicate themselves to providing crowdfunding for house flips and renovations. Quite a fair share of options offer pre-funding, whereas some tend to offer a slower closing mode, i.e., the loan doesn’t close until you have funded it. These websites have a similar genre to that of hard money lenders. They are costly compared to the others but will always provide loans regardless of how many pending ones are going under a person, focussing on the deal’s potential.
What sites can be used for Crowdfunding?
The crowdfunding website Groundfloor tends to grant loans across 31 states, ranging between $75 thousand to $1 million, with options to finance 100% of the loan-to-cost if you’ve got the correct experience, availability in a maximum of 3 weeks, no need to submit return proofs or statements for loans under $500,000, and no payments coming early during the term of the loan. The interest rates are around 5.5% and have additional points as well.
The borrowers will have to pay at least three months’ interest rate, regardless of whether they pay early. The closing costs are around $1,250, with an additional $250 and points between 2 and 4. The only disadvantage is that you will need some experience to earn money from their end.
Another option, Patch of Land, offers a line of credit for house flipping worth up to 3 million dollars. Finances are available for up to 85% of the cost, with shorter closing times and interest rates beginning at 7%. In addition, monthly interest payments can be made automatically between one month and thirty-six months. They’re good because they work with both first-timers and experienced ones.
Lastly, Fund That Flip also provides loans to investors with potential, and that too worth over $100,000. The costs of renovations are covered 100 percent, and the terms of loans are around three months to 24 months. Their interest rates are around 8.49% and upwards, but the homeowner is not qualified for the loan.
Drawbacks of Crowdfunding
Experts believe obtaining hard money loans for first-time flippers would be much easier and quicker than obtaining money via Crowdfunding. If the paperwork is intact and set in the correct order, a lender known to the flipper can grant the loan in as little as 24 hours. Also, borrowers might not be able to negotiate like they do with private lenders. As many people are coming in to fund one loan together, their parameters are set pretty high.
In Conclusion: What about house-flipping and the funds?
When you think you must get into house flipping, the fund’s issue arises, and the above funding methods come to your rescue! These three hard-money lenders, private lenders, and crowdfunding possibilities are a great chance to make your flipping business successful.
Once you know what needs to be done, how it needs to be done, and the importance of networking, you’re all set to attain funds; the only point is to find suitable projects for them. Even though these funding opportunities can be more costly, they are the best. You start attaining funds for your first project, and you not only initiate with one but also become capable enough, to begin with others as you become experienced flippers! Hence, a higher interest rate is a fantastic opportunity to initiate a successful business; you can go for it once you know the risk.
After leaving Wells Fargo Bank in 2014, Daniel began a career as a finance consultant, advising companies and individuals on economic policy, labor relations, and financial management.
At Promtfinance.com, Daniel writes about personal finance topics, value estimation, budgeting strategies, retirement planning, and portfolio diversification.
Read more on Daniel Smith's biography page.
Contact Daniel: daniel@promtfinance.com