With prices high and real estate inventory still relatively low, this is one of the most advantageous times in decades to dip your toe into the renovation market. Perhaps you have some spare capital and have always wanted to give fixing and flipping a try, but don’t know where to start.
Let’s go over the information you need and the questions you need to consider when applying for a fix & flip loan.
Pick Your Dream Reno
First, and most obvious, you will need to choose the property that you wish to renovate. It might be tempting to set your sights on a property being offered cheaply, but beware – a home being sold at under market value, especially in today’s seller’s market, might have hidden issues that would seriously strain your rehab budget. If it seems too good to be true, it might just be.
Once you have pinpointed the home you want to refurbish, the lender will need the property address, so that it can assess the home’s current as-is value, usually with an appraisal. This provides to both sides the property’s value before one single nail is hammered or wall repainted.
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Make a Budget, Have a Plan
Another piece of info that a lender will require is how much money you are willing to spend to renovate your rehabbed property. It is imperative that you outline the specific improvements that you plan to make and create a budget that lists every expense needed to make it a reality, from contractors to insurance fees.
This can often be where some fix & flip dreams encounter a roadblock. As the purpose of flipping a home is to improve it while selling to a homebuyer at a reasonable profit, if the property is unmanageably expensive to repair, it is not a worthwhile candidate as the subject of a fix & flip loan.
The universal rule of thumb in renovation loans is to follow the ARV 70% Rule. This states that you shouldn’t pay more than 70% of a home’s ARV, or After Repaired Value, on the property plus renovations. In other words, if you buy a property for $500,000 and its after repaired value is $1 million, you shouldn’t spend more than $200,000 (for a total of $700,000) on renovations. Otherwise, it is not a worthwhile endeavor for you, or your lender, to pursue.
How is the ARV determined? For reno loans, the appraiser is provided a list of desired improvements while appraising the property as-is. He or she can then take that information and determine what the value of the property will be once the proposed repairs are made. From there, it only takes a quick calculation to determine if the renovations for this particular property are worth pursuing.
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Examine Your Finances
The qualifications and bonafides needed for a fix-and-flip loan aren’t the same as a conventional home loan, especially if you’re applying for a hard money loan. But your lender still needs proof that you’re in a financial position to pay off your loan, up to and including a check of your credit score, bank statements, and overall liquidity.
Of course, the purpose behind fixing and flipping a property is to have a healthy profit after paying off your reno loan. However, the final outcome of a property flip is never guaranteed and lenders require evidence that you will still be able to make payments if the home fails to sell for whatever reason.
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Banks and Beginners Don’t Always Mix
It can sometimes be difficult to secure a fix-and-flip loan as a first-time flipper, as the process requires complex budgeting, contracting, and rehabbing that a typical conventional home loan does not. Most lenders take previous experience with house flipping into consideration when approving – or denying – a fix-and-flip loan.
While a borrower’s personal credit is generally used as a form of collateral in a conventional loan, the investment property in question is usually the collateral in a fix-and-flip loan. That means that the lender takes a first lien position against the property to be flipped while it is in the process of renovation. If the loan is defaulted upon, this gives the lender the right to foreclose. And all your time, money, and effort can swirl down the drain.
As tantalizing as the prospect can be of buying a home in disrepair, fixing it up, and reselling for a tidy profit, potential flippers should be cognizant of their knowledge level and experience limitations. Lenders will want to know if you own any other properties and for how long you’ve owned them, and whether you’ve flipped any homes previously. This, along with your level of preparation at the bargaining table, can provide insight as to how ready you are to appropriately manage the rehab process.
Park Place Finance offers fix-and-flip loans for all your renovation investment needs. Our team of loan professionals has the tools to make your fix-and-flip dreams happen, whether you’re a beginner, an expert, or somewhere in between. With higher interest rates and a short timeline, you’ll make your money back and more. Contact us today at 866-407-1599 to discuss your financing options.