House Flipping Loans

When done right, house flipping can generate a profitable and worthwhile profit for the individuals in practice. Though the act of buying, flipping, and reselling properties can be an incredibly lucrative investment for many, there are still enough costs in flipping a house that is often more expensive than just buying a house to live in.

Consider that flipping a house means that you will have to pay to become the property owner for the back utilities and property taxes plus the purchase price of the property and closing costs. All of those costs come before you even start considering the costs of actually renovating the home. Additionally, there are taxes you need to remember, such as capital gain taxes.

All of these costs add up quickly, and getting a loan can be hard as a new/inexperienced house flipper. This is because there is a higher risk to the loaner when the goal is to flip and resell the house than to just buy and live in the home. For an inexperienced house flipper, this means that they may charge you a higher interest on your loan because you don’t have the track record of success that more experienced and established house flippers have. As such, some lenders may even choose not to work with/lend to inexperienced house-flippers.

However, this doesn’t mean that new/prospective house-flippers are entirely out of luck.

What Are “Hard Money” Loans?

Hard money loans are both more expensive than traditional loans, but they also have much harder terms in addition to the higher expenses. These lenders are companies and are most often used in house flipping because they loan money with the goal of being repaid quickly. This is perfect for renovating a property with the intent of selling it, as most house flipping projects only take 6 to 12 months in total.

Unlike banks that make most of their money on mortgages and loans over many years, these lenders are much better suited for house flipping by comparison. Many banks charge a substantial interest rate for house flippers, assuming they agree to the loan at all.

In general, hard money loans have rates of about 12% to 18%, with an additional two to five points. These “points” are equal to 1% of the loan amount, and instead of paying them at closing as you would in a traditional mortgage payment, depending on your lender, you may not have to pay back these points until the home sells. Additionally, hard money loans are based on the after repaired value of the home, which means you may be able to budget your way around not paying out of your own pocket while you are renovating the property.

How Are Hard Money Loans Different from Conventional Loans?

Unlike conventional loans, there are a lot fewer guidelines for hard loan lenders to consider than the bank might be bound to. Hard loan lenders are much more expectant to be lending on homes that are in some state of disrepair, as they’re expecting to be a short term/house flipping loan. A property in a serious state of disrepair doesn’t meet the guidelines of a more conventional mortgage by the bank, but a hard money lender doesn’t need to be concerned about that bureaucratic red tape and are thus much more receptive to those less-than-desirable homes house flippers often start with.

This means the hard loan lender will be looking at the trustworthiness of the individual planning to flip the home, as well as the realistic resale value, and costs of the repairs to make their decision. If it doesn’t look too out of the question, and everything satisfies the hard loan lender, then they will make the loan.

As mentioned previously, conventional banks are much more concerned about new/first-time house flippers. There is often more risk in new house flippers, but hard money lenders won’t be nearly as concerned about credit scores and other qualifications the bank may look at. This is because, in the end, the moneylender can foreclose, take ownership of the house and choose to make a profit on the house themselves if the house flipper they were working with defaulted.

The hard money lender may still ask to see tax returns, credit reports, and bank statements, but they oftentimes don’t care if the down payment for the loan is borrowed. All of these things make a hard money loan easier to obtain for a first-time house flipper especially and make it quite different from more conventional loans. Something to remember in a fix-and-flip loan is that the qualifications for the loan are less about you, as they are with conventional bank loans and more about the property.

Something they do have in common, however, is that the lender will hold the first position lien. This will be true until the house flipper repays their loan. The individual borrowing will still hold the deed to the property and be the owner.

What To Expect While Finding A Lender

In the age of the Internet, hard money lenders are much easier to find now online. They often have their lending rates and easy to find contact information on their website. All hard money lenders are different, but there are a few fees you should be expecting to pay.

There is the down payment, of course, that will vary from lender to lender. There are two methods that most lenders use; there are loan-to-cost and loan-to-value ratios.

Loan-to-cost commonly sees lenders separating the home cost and the repair costs while considering. Thus, they may finance 100% of the repairs and renovations, but only 90% if the property. On the other hand, loan-to-value ratios may see a limit to the loan of upwards of 75% of the as-completed value that’s been projected. Of these two, your loan is limited to the lesser of the two methods.

The more experience a flipper has when they’re applying for a loan with a lender, the lower the fees often go for the borrower. Interest rates, for example, of a previously one-time house flipper can be about 12%, but by the time you’ve successfully completed five house flipping projects, the interest rate may go down to 9.99%.

Private Lenders and How to Vet Them

Private lenders often work like hard money lenders, but they might have better rates and terms depending on the individual. Typically private lenders are much more open to negotiations than hard money lenders are, and they may even be more willing to become a partner and not charge interest for exchange of sharing in the profits.

The best way to feel more comfortable with the idea of a private lender is to be confident when negotiating and create a network for yourself of other house flippers who have more experience than you in lending. Private lenders vary rates and flexibility much more dramatically, but they will take the first position lien on the house as the bank and hard money lender will. They can be found at networking events for local real estate.

Talking to other more experienced house-flippers is the best way to vet and be sure of a private lender. See if they had experience with or know someone who had experience with this lender, and if the lender themselves has references, it’s worthwhile to call them before agreeing to anything.

Not properly covering your bases and being sure of a private lender could lead to unexpected fees, legal battles over terms of the contract, and you may even lose the earnest money deposit in the process. These should be reason enough to make sure that you are confident in the contract and the individual’s character before you borrow from a private lender.

What is Crowdfunding, and is it Worth While?

Generally, these websites work like hard money lenders and are relatively expensive. These websites will have multiple individuals and lenders to contribute to the loan, and all of whom will collect interest on that money.

These sites vary and are not often targeted to house flippers. The site may provide the money and close the loan while you wait for investors, or they may just have you wait for the investors to put in enough money and not close the loan until it’s funded entirely. Thus, crowdfunding websites oftentimes take much longer than hard loans or private lenders. Meaning if you need cash fast, you will be out of luck with Crowdfunding by comparison.

Additionally, these websites are often much less open to negotiations and, in general, are much slower than other methods of obtaining a loan.

There are many ways to get the financial help you need to start house flipping and earning revenue on your project. The best advice someone could give is to ensure that you have other house flippers you can talk to throughout the lending process and consider your loan needs so that you can be confident in your negotiations and obtain a loan.

House flipping can be lucrative and worthwhile when you know what you’re doing, budget your loan well, and with more experience, you’ll find obtaining a loan easier and easier with every successful flip.

If this seems like too much for you to handle by yourself, Drew Cashmere at South Florida Business Funding, an alternative business funding company,  can help with your search for the right funding source and can be your one point of contact throughout the entire process -  call Drew today: 786-544-2700!