Fix & Flip Loan

Note:

If you are looking to buy a property that is already habitable and simply needs some renovation so that it can be resold for a better price, other more favorable loan options may be available to you, including a DSCR loan to buy the property and a second mortgage on top to cover renovation costs.

Which lenders provide fix and flip loans

The good news is that there are a few specialized institutional lenders who provide fix and flip loans. These specialty fix and flip loans have a lower interest rates than hard money. These institutions are not direct lenders; you need to go through a mortgage broker to have access to their loan programs.

At Prosperity Lending, we are such a mortgage broker; we provide access to several institutional lenders that provide fix and flip loans. We can also broker hard money loans when needed (for ultra-out-of-the-box situations); this is more costly and we try to help our clients avoid it, but it is an option.

How to qualify for a fix and flip loan

Experience

The number one requirement a fix and flip lender is going to have is a borrower who has done at least three fix and flip projects in the last three years or so (the exact number of years depends on the specific lender). They want to make sure that you have the knowledge and experience necessary to take on such a project.

As part of a fix and flip project, you will have to deal with cities, municipalities and their building and safety departments. This can be quite cumbersome in terms of what they require. Getting an inspector to come and perform the required checks on the property can involve costly delays, and there are a myriad of problems that can surface once you get involved with one of these projects. Experience is therefore crucial.

If you are a real estate investor and you don't have the experience, you can solve that by hiring or partnering with someone who has the experience. Similarly, if you have the experience but you don't have the cash, you can bring on a cash partner.

Legal entity and paperwork requirements

If you are going the hard money route, you will not need to have a formal entity. If you have partners, each partner can sign the loan documents as an individual. In general, less paperwork and documentation is required with hard money lenders.

If you are applying for a fix and flip loan with an institutional lender, they will require that you and your projects partners are formally organized into a legal entity such as an LLC, and they will require extensive formal paperwork and documentation as part of the loan application.

Down payment

Fix and flip loans usually require a down payment of 25-35%.

Credit score

On a fix and flip loan, lenders usually require at least one of the partners in the project to have a credit score of 660. Also, they will want to see that you don’t have lots of collections on your credit report.

There are options available with some lenders where they may give you the loan regardless of your credit score. However, the fees, rates and closing costs on those loans will be a lot higher and we try to help you avoid those.

Budget

When you get a fix and flip loan, you are getting a purchasing loan and a construction loan all in one. To complete a fix and flip project successfully, time management and advance planning is crucial. As part of the application process, the lender is going to ask you for a very detailed, formal budget. This budget has to be very well thought through because the lender is going to subject you to it, and the lender is going to disburse the construction funds in stages as the work on your budget gets completed. The budget submitted to the lender has to follow a specific format, which we can help you with if needed.

What happens if things don’t go as planned

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 happens quite frequently. 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 doesn’t 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 to achieve this might be through a DSCR loan; this is a loan that enables you to take out a loan based on a property’s rental income (regardless of your personal income).

The benefits of fixing and flipping

As a final note, when done well, fixing and flipping can be very lucrative and is incredibly valuable to communities. Fix and flippers do great work that adds to the stock of desirable homes available. That is sorely needed, especially with the current state of housing in many areas, where there is a big deficit of (affordable) homes.

We will do everything we can to help. Feel free to schedule a Free Brainstorming Consultation and ask any questions. We hope to be the mortgage broker on your next project.

You can give us a call at 310-294-9417 or self-schedule an appointment online.

“Thanks to the loan I got, I am expanding my business, and the future looks promising in ways I didn’t think possible.”

—Merilyn, Client