Fix and Flip Loans
Fix and flip loans (also know as hard money rehab loans, investment property rehab loans or house flipping loans) are short-term financing tools that enable a real estate investor to obtain the necessary capital to acquire, improve and resell a property for profit. Fix and flip financing is available from alternative and hard money lenders but not available from traditional lenders such as banks. At Global Funding Sources, we work with some of the leading lenders in the Fix and Flip Loan category.
Fix and flips became very popular a few years ago as the housing market recovered, and they continue to be a profitable business today. According to RealtyTrac, which tracks real estate data and analytics, the average return on investment for house flippers grew from about 20 % in 2011 to 35 % to 2015. In some parts of the country, 8-10 % of all single family home sales are fix and flips.
House flippers stand to profit nicely from this growth, but they are not the only ones. Many flippers rely on fix and flip loans to fund renovations. Investing in those loans can potentially give you annual returns of 12-14 % or higher.
Because fix and flip loans are financed typically by alternative and hard money lenders, as opposed to conventional banks, it is comparably easier to qualify for a fix and flip loan. A borrower generally needs a credit score of at least 620, although there may be some flexibility according to the particular lender. An important criteria lenders look for is how much experience the borrower or investor has in the area of real estate flips. For example, suppose you have already successfully flipped several homes, but your credit score is below 620. Your chance of qualifying for a fix and flip loan is much greater than someone without experience.
In addition to credit score and experience, you will need to put down a certain amount of deposit, what fix and flip lenders call skin in the game. That magic number is tyipcally 15% to 20% of the purchase price of the pre-renovated home. The higher your credit score, the lower your required downpayment. For example, if you are a pretty strong borrower and you are buying the home for $200,000 – before any renovations – you will be required by 99% of all fix and flip lenders to contribute at least $30,000 in cash (15%) to the deal. After that the lender might be happy to loan you the remaining 85% of the purchase price ($170,000) plus another, say, $90,000 to fix up the property.
Occasionally, you can pledge equity in another property as your downpayment. For example, let’s suppose you own another property worth $500,000 and your first mortgage is only $250,000. You might be able to provide a second mortgage on this property as additional collateral to your fix and flip lender in lieu of the cash down payment amount.
What is the After Repair Value (“ARV”)?
Every fix and flip loan will consider two pertinent values – the As Is Value and the After Repair Value (“ARV”). The As Is Value is the value of the property you purchase prior to any repairs, improvements and renovations. The After Repair Value is the value of the property after the renovation has been completed. This value is also the single most important variable in the whole underwriting process. If a fix and flip deal passes the after repair loan-to-value ratio test, the chances of the loan being approved is significantly greater.