Increasing mortgage rates have pushed many buyers out of the market but according to real estate data company, ATTOM, home flipping remains high across the nation.
Investors with cash can typically complete flip and fix property deals much more quickly but “33.9 percent of homes flipped in the first quarter of 2023 had been bought with financing.”
What is a Flip and Fix Loan
A fix and flip loan is a short-term loan that real estate investors use to buy and renovate a property in order to resell it for a profit.
These loans are typically hard money loans that are secured by the property being purchased or renovated, and they typically have higher interest rates and shorter repayment terms than traditional mortgages.
Hard money loans don’t originate from conventional lenders, but rather from direct lenders or private enterprises that accept the property as collateral.
Features of Fix and Flip Loans
Short-term. Fix and flip loans typically have terms of 12 to 18 months. This is because investors are typically looking to sell the property after they have completed the renovations.
High-interest rates. Fix and flip loans typically have higher interest rates than traditional mortgages. This is because these loans are considered to be riskier, as investors are taking on more debt and there is a chance that they may not be able to sell the property for a profit.
Secured. Fix and flip loans are typically secured by the property being purchased or renovated. This means that if the borrower defaults on the loan, the lender can take possession of the property.
Quick financing. Borrowers typically get access to quick loans that meet their needs better than the big banks. Fix and flip loans may be necessary for some real estate investors to make a profit. However, it is important to remember that these loans are risky and investors should carefully consider their financial situation before taking one out.
Risks associated with Fix and Flip Loans
The property may not sell for a profit. If the property does not sell for a profit, the investor will be left with a large amount of debt.
The renovations may go over budget. Renovations can often go over budget, which can eat into the investor’s profits.
The property may not appraise for the after-repair value. The property must appraise for at least the after-repair value in order for the investor to get a loan. If the property does not appraise, the investor may not be able to get the loan or may have to come up with more money out of pocket.
How To Find a Fix and Flip Loan
Groundfloor is a real estate investment and lending platform for fix-and-flip and new construction residential projects. Because Groundfloor is a direct lender of flip and flip loans, funding can be completed as fast as 2 weeks.
The loan package is reviewed by the Groundfloor team that will contact the borrower to get more details about the project and discuss terms.
Here are some details of a GroundFloor Fix and Flip Loan:
- Borrowers can submit a loan package online along with pictures of the property
- Rates starting at 7.5%; Points rolled into closing
- Borrowers should have a minimum credit score of 640
- There is no minimum transaction experience required
- The minimum property value must be $70,000
- 1-4 Unit Properties in 32 states
- New construction projects in all states
- Loan size range from $75,000 – $750,000
- Loan terms range 12 or 18 month loans
- Up to 70% LTARV; Up to 90% Loan-to-Cost, depending on experience.
Refinancing a loan from another lender is available at Groundfloor if the project is complete.
Benefits of Fix and Flip Loans
Fix and Flip Loans may cost more than traditional financing but there are several benefits to consider:
- Loan terms are more flexible than traditional banks and credit unions that typically take borrowers through a time-consuming loan approval process.
- Significantly shorter approval process that can give investors a competitive edge in bidding for hot properties.
- Fix and Flip loans typically exclude a pre-payment penalty, allowing investors to retain their profit after the sale of a property.
- Unlike a bank or credit union most flip and fix lenders allow a variety of property types without strict limitations.
Engaging in property flipping involves purchasing a real estate asset, refurbishing it, and subsequently selling it at a higher price to secure gains.
The pivotal factor for success lies in identifying properties that are under market value and in need restoration.
If you are considering investing, you want to reduce the cost of fixing and flipping a property to increase your profit margin.
Here are some tips for reducing the cost of fixing and flipping a property to turn a profit:
Choose a property that is in good condition. This will save you money on renovations.
Do-it-yourself renovations. If you are handy, you can save money by doing some of the renovations yourself.
Negotiate with contractors. Get estimates from multiple contractors and negotiate for the best price.
Shop around for materials. Get quotes from multiple suppliers to get the best price on materials.