Fix and Flip Bridge Loans During Covid-19

Flipping homes can be a great investment opportunity. Putting in a little work can transform a run-down dump into a million-dollar property. During 2019, flippers managed 40.6% ROI. However, it can also take a lot of money. This is especially true during COVID. The pandemic has caused a lot of disruption for flippers. There could be some issues in the supply chain, making it harder to get the products you need. In other cases, the local property market might have been changed, with buyers more reluctant to purchase because of market instability. Because of this, many people have considered the prospect of taking out a loan. This can add more financial stability and make it easier to get the funds to acquire future properties to fix and flip.

However, the process of applying for a loan can be difficult. In some cases, the banks will become fixated on your credit score. If you have a poor financial history, they might not want to give you any money. Even if you can get approved, it will often take a long time to get the funds. This can be a big problem, making it harder for you to move spontaneously and act on emerging opportunities. Thankfully, there is another option. You’ll be able to turn to an alternative funding group. Let’s take a closer look at how these work and why you might want to consider using one.

What is a Fix and Flip Bridge Loan?

Many flippers will have an eye on future projects while completing the current one. You might be researching a particular area, or even inspecting properties. In this case, you might want to consider getting a bridging loan. This might also be referred to as a swing loan, interim financing, or gap financing. In this case, the loan will be designed to allow you to purchase the second property, while you finish renovating and selling the current one. Once you sell the first property, you can use the money to pay off the bridge financing, then you can take any profit and start working on the next property. Because of this, these types of loans are popular amongst investors, especially those who work on larger portfolios.

How Do You Know if a Fix and Flip Bridge Loan is Right for You?

Before you apply for fix and flip bridge financing, there are a few things that you will need to consider. First, for these loans to work, you need to have a clearly defined exit strategy. In most cases, this will be renovating and selling the first property. You’ll have until the end of the bridging loan term to do this. So, you must have a clearly defined timeline. With so much uncertainty caused by the COVID pandemic, it’s best to build in some contingencies. This will ensure that you won’t need to worry about unexpected delays to the projects.

The next thing that you will need to think about is how much of the initial property that you own. For most flippers, they will own the property themselves. This is essential if you want to apply for a bridging loan. There might be some times where the situation is more complex. For example, the property might be owned by a third party. In this case, you might need to get more clarification about whether you will be able to apply for a loan.

Finally, you’ll need to think about how quickly you want the money. If you’re going through the banks, you’ll often need to wait for a few weeks or months before it turns up in your account. This can cause you to miss out on the opportunity. However, when you go with an alternative financing group, you’ll be able to get the money fast. You’ll know whether you were approved in 48 hours. Once you are approved, you can have the money in your account within seven days. This is optimal for investors. This gives you the best chance of getting the property that you want.

What are the Conditions for a Fix and Flip Loan?

If you want to apply for this type of loan, there are a few conditions that you will need to meet. First, you’ll need to have experience with real estate flipping. You’ll need to have worked on multiple properties or have several real estate holdings. You will be asked to provide some documents to verify this. You’ll also need to make sure that you are registered with the state authorities. However, you won’t need to provide any tax returns or employment records.

You’ll also need to make sure that you’re filling out the right forms. The type of loan that you’re applying for will determine what type of information you’ll need to supply. For example, you might need to provide some bank statements. You might also need to supply a FICO score. The minimum FICO score to be approved will depend on the type of loan that you are applying for. In general, though, the application process when you go through an alternative funding group won’t be as intensive as the one required for the bank. Fewer forms to fill out means that you’ll be able to get fast loans.

How is the Value of a Fix and Flip Bridge Loan Calculated?

The type of loan will often depend on how much you’ll be able to apply for. As an example, you’ll be able to get up to $5 million for new construction loans. If you want to get a multifamily bridging loan, you might be able to access $10 million in funding. Generally, the amount of bridging funding that you’ll be able to access will depend on the value of the first property. There are a few ways that you can calculate this.

First, you can apply for an After Repair Value (ARV) loan. This is a good choice for properties where your renovations will be expected to add value. To show how this works, let’s look at an example. Imagine you find a property that you can purchase for $150,000. You estimate you’ll need to put in $50,000 worth of renovations into it. After this is completed, you expect to sell the property for $300,000. Generally, the loan value will be between 65 to 75 percent of the ARV. This could mean that you’ll be able to get a loan for $195,000. Before this, the lender will want to double-check your calculations, making sure that your estimates are realistic. Often, this type of funding is only appropriate for properties that are expected to make a margin of between 50 to 100 percent when sold.

The second method that you can use will be the Loan to Cost (LTC). These properties are still expected to sell at a profit. But they won’t have the 50 to 100 percent margin of the ARV loans. Typically, you’ll be able to get between 75 to 80 percent of the costs covered by an LTC loan. Again, the lender will want to double-check your calculations to make sure that they are accurate.

How Long Do Fix and Flip Bridge Loans Typically Last?

How long a bridging loan will last can vary. In general, though, they tend to have a fairly short life. Often, this can be as little as a few months. This will give you plenty of time to finish and sell the old property, then buy the new one. However, if you want a loan with a longer period, talk about this with the lender. In most cases, they won’t mind changing the terms a little to create a loan that will suit you better.

Do You Need Collateral For a Fix and Flip Bridge Loan?

Most loans will require some type of collateral. This reduces the risk that the lender will experience by providing an incentive for you to pay. A bridging loan isn’t any different. In most cases, though, the collateral will be taken from the expected value of the renovated property. However, as long as you sell the property and pay off the loan, you won’t need to worry about collateral. Also, many lenders understand the effect that COVID-19 has had on your business. Because of this, if you contact them and explain the situation, they might be able to provide some advice.

What are the Risks of a Bridging Loan?

As we’ve seen, bridging loans can be a great option for property flipping investors. However, that doesn’t mean that they don’t come with a few risks. First, there will often be a high-interest rate. This will be calculated daily and charged monthly. Because of this, the longer it takes you to sell the property and pay off the loan, the more expensive it will be. This is especially costly if you still need to make repayments on the original mortgage. Due to the power of compounding interest, the longer it takes to sell the property, the higher these costs will become. Because of this, it’s good to add a few extra weeks to your plan, in case of unexpected setbacks.

Another potential issue that you might face is that there will be a deadline that you need to sell the property by. If you don’t sell the property by the time of the deadline, there will often be a term in the contract that can allow the lender to intervene. This means that they can force you to sell. It’s important to consider this prospect when deciding how long the term of the loan will be. This is one of the best ways to avoid any potential issues.

Conclusion

A bridging loan can be a great option for a range of people. Everyone from multifamily developments to rehabilitation and resale investors will be able to use this type of loan. This has become even more important in the age of COVID, where there is a lot of uncertainty around the industry. To learn more about this type of fast loan, get in touch with the experts at South Florida Funding Group. Our friendly team will be able to talk you through your options, helping you pick the right type of financing for you.