The Fix and Flip Loan: What You Need to Know Before Getting One

Are you an aspiring real estate investor looking to learn more about fix and flip loans? Do you want to know more about the process before you fully commit to taking out the loan? A fix and flip loan is excellent for those who want to purchase properties and flip them to make a significant profit.

Fix and flip projects have the potential to be a very lucrative source of income if done right. If you are ready to learn more about the process of fix and flip loans, then you have come to the right place. We will briefly go over what these loans are and who you can contact to start the application process today. 

What Is a Fix and Flip Loan?

A fix and flip loan is a loan that many real estate investors obtain to purchase cheap or rundown homes. The goal of getting these loans is to buy a property, fix it up, and sell it for a profit. Most real estate investors purchase and renovate these properties within a short 12 to 18-month timeframe.

Conventional Loans vs. Fix and Flip Loans

Some real estate investors use conventional loans or other lines of credit to finance their projects, but others will use fix and flip loans because of the larger limits that come with them. Conventional loans are naturally designed for those who purchased homes for long-term residency, and they come with stricter rules and regulations. 

Fix and flip loans don’t have the same rules and regulations; in fact, they do not have regulations. Most of these loans come from private or individual investors. 

Hard Money Loan and Lenders

It is important to familiarize yourself with the terms and conditions that come with hard money loans. Most real estate investors typically seek them out because of the ease of access.

Hard money loans are secured by collateral, which in this case, is the property you wish to purchase. Most hard money lenders do not concern themselves with the creditworthiness of the borrower. If you default on your loan, the lender will take possession of the property and sell it themselves. 

Where to Find Hard Money Loans

As mentioned earlier, you must obtain a hard money loan from a private lender or investor. These loans do not carry the same regulations and rules that conventional loans. Those rules would include specific credit requirements and intense approval requirements. 

It is also important to look out for predatory lending. Because hard money loans do not have the exact requirements that most traditional loans do, there are a few lenders that may participate in predatory loans. 

These predatory loans usually have unfair terms and conditions that are meant to keep you in debt. Make sure to do your research on your lender before you sign any paperwork. 

Fix and Flip Loans for Beginners

There are four easy steps that you need to take when starting your fix and flip project. As mentioned earlier, the end goal of this project is to obtain a cheap piece of property, renovate it, and sell (flip) it for a higher price to recuperate your initial investment and make a profit. 

Step One: Find the Right Property

It is imperative that you find a piece of property that has great potential to sell at a higher price after you fix it up. It is best to have the property inspected as soon as possible. 

You may also want to partner with a local reputable real estate agent to determine what renovations would make the home sellable. Your local agent can also advise you what price you can expect to sell it at. Once you have a solid plan, you should then reach out to a contractor to price out the cost of the repairs and renovations. 

Step Two: Obtain a Loan

This step is one of the most challenging steps of the entire process. There are several different ways that you can obtain the necessary money you need to fund your project.

You have the option to either use your own money or to obtain a loan. Make sure that you review all of your options before you make a financial decision. 

Step Three: Rehab the Home

Once you have secured the money you need to fund your fix and flip project, it is time to get to work. Make sure that you stick to your plan outlined in your loan; otherwise, you risk going over your budget. If you and your contractor created a game plan and a timeline for the renovation, make sure that you keep to your schedule. 

Step Four: Sell the Property

Once you have completed the renovation and had the property inspected, you can sell the home. It is best to work with a realtor to sell the property at your projected price. 

Why Use a Hard Money Loan?

As mentioned earlier, most fix and flip projects do not receive their funds from traditional banks, and they are administered from personal lenders. This is helpful because these private lenders have their own rules for when they release the funds. 

Most conventional loans take between 30 to 90 days before they release the funds, whereas hard money loans take only a few days. Most fix and flip loan applications receive an approval the same day and release the funds within the same week. 

Fix and Flip Properties

Fix and flip loans are incredibly versatile. You have the option to use the funds to purchase single-family homes, multi-family residences, commercial buildings, and other types of properties that most conventional loans would not cover. 

Hard Money Lender Considerations

As mentioned earlier, fix and flip lenders are not too concerned with the borrower’s creditworthiness, and they base their decision on the type of property you wish to purchase. Although that still remains true, there are a few other things most lenders look into before approving your loan. 

Other considerations hard money lenders take:

  • The property’s estimated value after repair
  • The potential cost of renovation
  • Your experience with fix and flip properties
  • Amount of available capital

Most lenders will base your loan on the property’s current value to help reduce the risk associated with the renovation process. Before you apply for a loan, make sure that you also have a decent-sized down payment on hand. Most hard money lenders look for 20% to 30% of the loan. 

Common Fix and Flip Mistakes

One of the most common mistakes most people make when fixing and flipping a home is underestimating any unforeseeable repairs. Some people will add features into the house that aren’t suitable for the neighborhood or the demographic of the homebuyers in the area. 

Most flippers believe that these additional features will increase the home value, which it may, but if homebuyers are not interested in them, you just wasted money. 

Other mistakes most people make on a fix and flip projects:

  • Working with inexperienced contractors
  • Underestimating the project timeline
  • Overestimating the post-renovation value

Although several different TV shows make it look easy to flip a home, you still need to put in a lot of work to make your project successful. Make sure that you create a plan with your lender and stick to it. It also helps to reach out to local real estate agents who might also be able to point you in the right direction of people to use for your project. 

Costs to Keep In Mind

When you build your fix and flip project game plan, there are a few costs that you should keep in mind. For example, you not only need to think about how much money you need in a loan, but you also need to consider contractor fees. 

There are also listing and broker fees associated with selling your home that you will also need to pay. As mentioned earlier, people underestimate the cost of repairs and do not plan for any unforeseeable repairs or mistakes. Make sure that you have enough additional cash flow to cover any unexpected repairs. 

Fix and Flip Loan Lenders

If done correctly, your fix and flip project will yield you outstanding results. Although this large amount of money you use to complete your project may seem intimidating, there is nothing for you to worry about as long as you have a solid plan. 

If you are ready to start your new journey as a real estate investor, contact us now! We have the proper resources you need to get your project off the ground and competitive fix and flip loan rates

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