Fix and Flip Loans
Repairing foreclosed properties and reselling them for a profit can be quite lucrative for real estate investors. However, these projects do require a number of upfront costs, including:
- The purchase price of the property
- Inspection, appraisal, and closing costs
- Fees for plumbers, electricians, landscapers, and other contractors
- Building supplies, materials, and tools
- Staging costs
- Listing fees
- Marketing expenses
- Real estate broker fees
These fees can translate to a substantial amount of money. For real estate investors who do not have access to funding that they can use to pay for these expenses, fix and flip loans are an option to consider.
What is a Fix and Flip Loan?
Fix and flip loans are a type of short-term, hard money loan. These loans are used specifically for real estate investments; the funds are used by investors who are interested in purchasing properties, fixing them up, and reselling them in a short period of time.
As a hard money loan, lenders that offer fix and flip loans do not rely on credit to determine a borrower’s eligibility; rather, they are backed by collateral in the form of real, tangible property. In regard to a fix and flip loan, the collateral is the property that the investor is looking to purchase. Like all hard money loans, fix and flip loans are based on a loan-to-value ratio, or the amount the investor is seeking to borrow compared to the value of the property (both the actual value of the property in its current state, as well as the projected value of the property once the flip is complete). The lower the loan-to-value ratio, the better the chances are that a fix and flip loan will be approved by a lender, as the lender will assume less risk financing the project.
Benefits of a Fix and Flip Loan
Fix and flip loans offer real estate investors who are interested in purchasing an investment property, rehabbing it, and then reselling it, a number of benefits, including:
- Reduced upfront investments, as the loan can provide access to the financing that is required for the project, including the purchase, restoration, and resale of the property.
- Fast access to funding, as fix and flip loans (like other types of hard money loans) are often approved in a much shorter period of time than traditional loans are approved.
- Easier approval ratings, since the value of the collateral, or the investment property, is used to determine a borrower’s eligibility, not the borrower’s credit history.
- Flexibility, because lenders are more likely to adjust the terms and conditions of the loan to accommodate the needs of the borrower.
- No prepayment penalties, so borrowers can repay a fix and flip loan before the term expires without having to worry about incurring any penalties.
Though the terms are shorter and the interest rates are higher than traditional loans, fix and flip loans are a viable option for real estate investors. Because they can repay the loan when they resell the rehabilitated property, investors usually aren’t burdened by the shorter terms and higher interest rates that are associated with these types of loans.
For real estate investors who are considering purchasing short sales or real estate owned (REO) properties, rehabbing them, and then selling them for a profit, fix and flip loans provide the funding that is needed to finance the project. With this type of financing, investors who do not want to put a lot of their own capital into the project, or who do not qualify for a traditional loan, can have access to the money they need for the investment project they’re interested in procuring.
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