Fix and Flip Projects—When Things Don’t Go as Planned

Fixing and flipping has become a popular concept in recent years, thanks to various TV shows. When you know what you are doing, it is a great way to earn money and help improve communities. In order to pull off a successful fix and flip, experience is key, and it is one of the requirements of a fix and flip loan.

However, even with experienced fix and flippers, sometimes things don’t go as planned. It could be that you went over budget while doing the renovations. It could be that the city has made you wait so long for a particular permit that the real estate market has changed, or it could be that you ran into another obstacle such as supply chain issues or the work taking longer than anticipated.

This is not uncommon. I would say that about a third of fix and flip loans don't go as planned, and about 20% of them get repossessed. This is why the costs of a fix and flip loan are comparatively high, because now the lender needs to foreclose on the home and incur extra expenses to recoup their investment.

But one thing that is not very well known is that lenders are not in the business of foreclosing and repossessing. Repossessing and reselling is risky to them, and in most cases any sales proceeds that go beyond the borrower’s debt have to be returned by the lender to the borrower. Additionally, foreclosure is something that costs lenders a lot of money, distracts them from their main line of business, and it's simply something they would rather not have to deal with. So lenders will make substantial efforts to avoid this outcome.

Do all the calculations beforehand

A particular word of caution: when you plan out your fix and flip project, always get the services of an experienced local realtor. You don't want to misjudge the price at which you will be able to sell the home at the end of the project. Try not to price your property at the top of the neighborhood. We recommend not going over 75% of the average value of the neighborhood because if something goes wrong, if the economy goes down or is very volatile, you want to have a cushion in case home prices turn out to be lower than expected when you are ready to resell.

What to do when the sale of the project doesn’t cover the loan or doesn’t leave any profit

If things don’t go as planned, you may find yourself in a situation where selling the finished property isn’t going to leave you with any profit. Or in the worst case scenario, the expected sales price of the property doesn’t even allow you to pay back the fix and flip loan.

If you suspect that your project is going to be underwater, contact us as soon as possible so we can help you brainstorm about your options. One option could be to negotiate with the lender for some kind of workout. Another option could be to hold the property, rent it out to cover costs and then sell it at a later time when market conditions might be more favorable; one way this might be achieved is through a DSCR loan; this is a loan that you can qualify for based on the property’s rental income (regardless of your personal income) and is specifically designed for holding residential real estate investment properties.

If you are in this situation, please schedule a Free Brainstorming Consultation to go over the situation and brainstorm about your options. I will give you helpful advice and answer all your questions about what can be done. As a licensed California real estate broker, I can additionally provide real estate advice on California properties.