A Fix and Flip Loan, often called a “hard money loan” or “private real estate investment loan,” is the most common source of funding for real estate investors who buy distressed properties, quickly renovate them, and then list them back on the market to earn as much profit as possible on the “flip”. The loan is secured by the investment property as collateral.
By the very nature of a fix and flip project, the whole process is ideally as quick as possible (from loan approval to closing on the property, rehabbing the property, selling it, then repaying the loan out of the sale), however it’s important not to short-cut quality of work or research, to ensure a successful project with optimal profit. You especially want the most competitively rated funding to be lined up and ready before the closing, so you can quickly secure the property and begin work. For that reason, checking off your steps of preparation is a good idea for even the seasoned veterans of fixing and flipping houses.
Here are 6 steps of preparation needed for most Fix and Flip loans:
Step 1: Study the real estate market
You need a thorough understanding and knowledge of your target real estate market, especially the neighborhood where the flip property is being considered. The difference between the current value of the flip property and the “comps” of renovated houses in the neighborhood, represents your potential profit after the distressed property is renovated. Knowing the comps will allow you to do a quick estimation of new property opportunities in the neighborhood. You’ll notice that fix and flip veterans tend to work their territory because neighborhood knowledge improves assurance of optimal profit.
Step 2: Set a Rehab Budget
Your initial rehab budget estimate will actually become part of your quick, “back of the envelope” estimating in Step One. This is the cost of the labor and material it will take to renovate the property, ideally bringing it to the level of quality and market appeal similar to the highest-valued neighborhood comps, so your property will sell at your projected price. Under-estimating the rehab time and budget is the most common pitfall of first-timers, but it gets easier and quicker with experience, as you get to recognize requirements of the work and create relationships with labor and material suppliers (such as flooring, painting and drywall resources). To get the most competitive loan from a local, private lender, it will help to either document your experience in the target neighborhood or to show detailed estimates of the rehab budget if you’re new to flipping.
Step 3: Confirming property status with the listing agent
Confirming availability and status of the property is a crucial step, especially in a competitive market where the supply of properties may be low, and the number of other investors is high. Talk with the listing agent, and spend time getting to know agents who work the area you are targeting. Invite them to coffee and touch base frequently. While a listing agent is restricted as to what they can say about a property’s status, it’s best to get status as soon as they can share, so you know how quickly you may need access to the funding to secure the property.
Step 4: Get pre-approved for your loan, so you can do the quick math.
This should actually be done prior to locating a property so that when you find an ideal property for a flip, you can quickly secure the funding for closing on the property. If the pre-approval process is quick and without costs, it’s in your best interest to get that done now. (If there are going to be any approval issues, you don’t want to find out later, when trying to close on the property, after all of your research work.) When you get pre-approved for lending, you are given your interest rate, so you can quickly do the numbers for any property opportunity: Your target sell price (of the flipped property) minus the purchase price (loan principal) minus the interest, minus the rehab costs, equals your target profit.
Step 5: Pre-arrange your listing resources and processes
You’ve secured the funding and the property and completed your rehab on schedule and budget. Ready to flip? Not until you can list the property and do the necessary marketing work to find the best buyer at the highest possible price. This is again where agent relationships are important. Unless you are going to be your own listing agent, you need an agent, and you need them to be ready to sell the house on your schedule. So, as soon as you apply for your loan on a flip house, let your agent know and they can actually begin their work of identifying buyers and marketing the house. The agent may even be part of your initial work (Step One) in running comps for the neighborhood and gauging demand for the neighboring properties.
Step 6: Continuously compare rates and terms of lenders
You either have a spreadsheet of some sort to evaluate your property opportunities, or you need to create one. For short-term, fix and flip loans, your loan rate will be one of your most important inputs to have current in your spreadsheet, and to have as competitive (low) as possible. Even if you have a solid relationship with a lender, compare rates and terms of other lenders continuously, as this is a variable that directly determines the profit you pocket after the house is sold and you are re-paying the loan plus interest.
You will find that these 6 steps all contribute to securing the most competitive fix and flip loans, as well as securing the properties. Experienced, local, private lenders will appreciate the preparedness, and that appreciation will likely be reflected in your rate, as a lender will see a prepared investor as being less risk, and will want to attract your repeat business.
There are several private money lenders known for real estate investment funding. But, we at MM Lending offer competitive loan rates and terms, with exceptionally quick and friendly processing in Louisville, KY, Cincinnati, OH and Indianapolis, IN.
For further details call us @ 502-400-3011.