Barely finished with his classes on flipping houses, Jason couldn’t wait to get started buying, rehabbing, and reselling property. I know because my friend called me up the next day to ask about how to choose between fix and flip lenders when the time came to fund his first deal. He knew he needed to make the best choice that would most benefit the project’s ROI so didn’t want to get swept up in details that didn’t really matter. Since I’d made more than a good business out of flipping houses, and had worked with plenty of different lenders over the years, he also knew I wouldn’t hesitate to give him the down-low. And, because I like giving every new investor—not just those I call my friends—every chance to succeed, he was right.
Comparing Fix and Flip Lenders’ Terms
Fix and flip lenders, also called hard money lenders, have a common purpose: to provide real estate investors with loans for buying and rehabbing fixers fast. And, for the most part, they’re able to do this because they loan money based on the value of a property, rather than solely on your credit-worthiness, employment history, or financial liquidity. Since traditional lenders, like banks and credit unions, do not lend under the same conditions, and often won’t let you borrow on a fixer-upper anyway, getting a hard money loan from a fix and flip lender is ideal.
Whether you’re just starting your career in real estate investing, like Jason, or have already flipped a house or two, at some point, you’ll likely have to pick a fix and flip lender to help you fund one or more deals. Of course, just as every investor and investment opportunity varies, the lenders that finance flips will differ from each other, too. What works for Jason may not work for you. And, the lender that helps you buy your first investment property may not be your best bet for the tenth. So, it’s always a good idea to compare your options before you commit to any terms and conditions.
In choosing a fix and flip lender that is ideal for you, it’s important to know exactly what you should be comparing. So, let’s take a look at the key terms and conditions that will help you determine whether any particular lender is a great match, a good backup, or a complete pass.
Typically, the loan amounts offered by fix and flip lenders range anywhere from $50,000 to five million dollars. Though, on occasion, a lender will provide a large credit line of up to ten million dollars to experienced investors who are buying multiple investment properties to flip. Where you are on the experience timeline as well as where it is that you tend to buy and renovate property will determine how much money you need access to. Of course, as your business grows, your financial needs—and, thus, your choice of lenders—may need to expand as well.
Fix and flip lenders base the maximum amount they’ll loan to you for the purchase of a property on it’s loan-to-value (LTV) ratio. This number, expressed as a percentage, reflects what the lender has calculated the home can be sold for in today’s market if you default on your payments. The LTV does not necessarily equal your purchase price. In fact, you’ll notice that many lenders explicitly state that they can loan you 100% of the cost to buy a house up to 60, 70, or 80% of its LTV. If they don’t state this outright, it’s important that you ask since it directly affects how much money you’ll actually be loaned. The higher the LTV, the more funding you might qualify for.
Fix and flip lenders charge points, also expressed as a percentage, on the money they loan. This percentage serves as a one-time catch-all for closing costs and other fees associated with processing the loan itself. It may be paid either up front as an origination fee or rolled into your payments. Calculated using a property’s LTV, it can be as low as two percent or as high as 10%. Some lenders advertise a flat rate, while others vary the points they charge depending on the experience of the borrower or the risk of the transaction. Since you’ll want to keep your cost to borrow as low as possible, you’ll want to pay as few points as you possibly can.
You can expect the interest rate for the hard money loan on your real estate investment to be more than what non-fix and flip lenders would charge. That’s because the duration of the loans are significantly shorter and the risk of lending is quite a bit higher. Usury laws can limit what lenders of all types can charge and most states cap the rate at around 20%. But, though high rates are typical with hard money loans, many lenders today don’t charge more than 15%. Some even charge less than 10%—great news for those investors who qualify. As with points, the less interest you have to pay, the more money you’ll have left in your pocket when you sell the investment property.
From start to finish, the timeline for most residential fix-and-flips is somewhere between three and nine months. Accordingly, most hard money lenders offer term lengths on their loans for up to about 12 months. Though this should be plenty of time for you to buy, renovate, and sell your house, surprise repairs do sometimes rear their ugly heads and create unexpected delays. So, when comparing term lengths, be sure to check that extensions are possible and whether you’ll accrue any penalties should you request one. Obviously, your goal is to get your property back on the market as soon as possible. But, if you need more time to finish your project, and repay your loan, having the option can help to save the deal and, therefore, your potential returns.
It’s more the norm than not to be given the choice of making interest-only payments on a fix and flip loan. When money is tight, or tied up in your rehab, it’s a great option to have. But, depending on your budget, it may not be the only option you want. Interest-only payments don’t make a dent in the principal. And, the longer you go without shrinking the principal, the bigger that end-of-term balloon payment is going to be. Luckily, most lenders will allow you to pay off the loan early without adding a penalty—a money-saving option you should take when you can.
Time to Approval and Close
Though most fix and flip lenders can approve your project fast and help you close on it quickly, too, their timelines do vary. Some lenders promise an approval in 24 hours, while others require at least a few days. And, whereas seven to 14-day closes are common, the occasional lender may be able to do it in less time—or, need to take more. How fast you need to move on a deal, and how competitive you want your offer to be, will determine the time to approval and close that works best for you.
It’s true that most fix and flip lenders that provide hard money loans are primarily concerned with the collateralized property—or, your deal. But, some may request to see your credit score, tax returns, and the value of other assets, especially if you haven’t been investing long enough to build an investment property portfolio. The purpose, more than anything, is to determine the level of risk that you present and to offer terms and conditions commensurate with that risk. If you have a foreclosure on your record or own few, if any, assets, you won’t necessarily be denied a loan. You just may not qualify for the best terms and conditions available. So, it’s good to know this up front when you’re making comparisons. Otherwise, you can continue shopping around.
In reviewing the terms and conditions you should compare when choosing fix and flip lenders, another issue that needs addressing is probably starting to make its way to the surface. With a potential deal hinging on whether or not you can fund it, how do you make these comparisons thoroughly and quickly? It takes time to make multiple calls, send several emails, take notes, and run your numbers—time you may not have to lose. But, when it comes to borrowing money, a hasty decision is rarely a good one. So, unless some of the best hard money lenders in the nation are working to make the decision easy for you, it might seem like you’re stuck between a rock and a hard place. Luckily, I’ve got just the tool to free you up.
The Choice is Easy When Lenders Work Hard for Your Business
As a professional real estate investor who buys and renovates property to resell, I’ve depended on fix and flip lenders to fund my deals throughout my career. It’s part of why new investors, like Jason, seek me out for advice. There was a time when choosing which lender to use was more work than I cared to put in. Comparing terms and conditions sometimes seemed to take as long as locating the right deal. Still, not one to unnecessarily increase my exposure to risk by making uninformed decisions, I did it. But, I became a happy camper the day I could stop working so hard at it. That was the day I became an independently owned and operated HomeVestors® franchisee.
Simply by becoming joining the HomeVestors® team, I gained access to a variety of reputable lenders I could trust. It started with my network of fellow franchisees. Whenever I needed a recommendation, I got it almost instantly. And, these were lenders that had already been vetted by the team and, therefore, also had experience working with other HomeVestors® franchisees. These pre-existing relationships certainly helped to speed up my ability to find funds fast.
With the introduction of a new lending portal that only HomeVestors® franchisees have access to, my searches got even faster. Now, all I have to do is add details about a deal into the portal, hit “enter,” then sit back and wait. I’m not waiting for very long, however, before multiple nationally-known and trusted lenders send their terms and conditions back. It happens so fast, in fact, that choosing which fix and flip lender to use has become one of the easiest parts of my day.
When it comes to funding your deals, choose from among lenders that work to make your choice easier and faster. Contact HomeVestors to see how you can get access to the proprietary lending portal today!