If you plan to flip a property – purchase it, renovate it, and sell it quickly – chances are you’ll need a loan. Heading to the bank may be your first instinct, but when you’re in a bind, fix and flip loans from private lenders can offer the best option for you to finance your flip.
While many banks will shy away from short-term loans, private lenders are uniquely positioned to quickly provide funding to properties you want to fix and flip then pay off your loan with the sale proceeds.
The first thing private lenders will assess your loan application is whether you’re eligible for a fix-and-flip loan. You can tilt the judgment in your favor if you focus on meeting the lender’s property criteria.
Generally, private lenders will evaluate these three key property attributes before giving loans:
1. Condition
This will be the lender’s top focus and should be yours, too. If the property you’re eyeing is in poor shape, the lender will think twice about handing you the money. We’re not talking about outdated appliances or flooring – think foundational, structural, significant water damage or electrical issues. A house that’s falling down (literally!) is generally not an attractive option unless you’re a very experienced flipper with a lot of experience pricing large renovations.
Even if you think the property has potential, it might sell for far less than what you first estimated, if local real estate laws force you to disclose prior defects you’ve repaired. This will go on to affect your repayment of the lender’s loan. It’s exciting to find a solid fixer-upper, but choosing a fixable flip property makes the loan more likely to go through.
2. Renovation Expenses
Your renovation and repair expenses should be reasonable and not blow up the total cost of your property. If it’s clear that your fix and flip requires a large loan compared to the property’s value, the lender may think twice before financing.
Take a realistic look at what repairs must be done and which renovations would add the most value to your property. Be objective and take your project list to the lender for added transparency. Choosing a property with cosmetic fixes as your flip is more likely to land you a loan and potential profit) than one that needs an entire addition or new foundation, for example
3. Potential Resale Value
In the end, it comes down to the sales price. If the potential resale value of your property can easily cover the loan amount you request, you’re more likely to get a favorable judgment from a lender.
Prove to the lender that you’ll recoup their loan amount. Imagine you need a $130,000 loan to fund a fix and flip you think you can sell for $200,000. The deal numbers might work like this:
Cost to buy the property: $100,00
Renovation costs: $50,000
Total costs: $150,000
Your down payment $30,000 (25% of the loan amount)
Amount you’re borrowing: $120,000 (60% of the property’s as-repaired value)
In this case, you’re borrowing $120,000 or 60% of the potential resale value of the property. The lender will likely have no problem providing a loan because you have a 25% down payment for the original loan and a 40% equity stake in the final sales price.
If you have previous experience profiting from flipping properties, a private lender will view you more favorably than a borrower without an impeccable track record. The lender may even relax your maximum loan limits, or drop your interest rates by a few percentages to secure your business.
However, the opposite is true if you lack experience. If you’re new to fixing and flipping, or this is your first loan, lenders will likely be cautious of giving you a loan. Your inexperience could lead to higher repair or renovation costs, a lower property value, or ultimately, a longer loan repayment. Lenders will err on the side of protecting their investment and compensating potential risks by increasing your interest rates.
That being said, a quality lender will ensure that you’re able to successfully close your property’s sale and net a profit.
When you finally decide to apply for a fix and flip loan, come prepared with all the required documents and a paper trail. Start your relationship out transparently and on the right foot to speed up your loan approval process and flip your property with peace of mind.
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