What Buyers Should Know About Fix And Flip Loans
Fix and flip loans represent another set of financial instruments for folks who want to invest in real estate. They operate a lot less like mortgages and a bit more like construction loans. However, there are some notable differences, and you should know about these 5 major ones.
Typically, fix and flip loans are for medium terms. Your loan won't be as short as some construction loans, which may be done in a term of months rather than years. However, it also isn't going to be anything like the 15- and 30-year mortgages you regularly see for home loans.
Instead, fix and flip loans tend to fit in the middle ground. Their terms can fall into a range between 12 months and a few years, although lenders are usually comfortable working with whatever short-to-medium-term target you have.
Notably, lenders take on significant risks with flipping. If a flipper makes a bad bet or just gets unlucky when the larger real estate market inevitably hits a down cycle, the lender faces a higher risk of the debtor defaulting.
Given the associated risks, lenders usually only offer fix and flip loans to people who have track records. If you've never flipped a house successfully before, you may have trouble finding a lender to work with you. Likewise, if a lender takes on an inexperienced flipper, they should expect to pay high-interest rates to compensate for the lender's obvious risk.
If you have a good record, make sure you can document it. Flippers who have worked with satisfied buyers should get reference letters and recommendations from them. Also, it's a good idea to have profit-and-loss numbers on hand so a lender can see that you're a good investment. If your track record has taken you through previous recessions successfully, make sure to highlight that fact. The same goes for documenting your operation's credit score and bank statements.
Less Conventional Lenders
Generally, fix and flip loans come from less conventional lenders. Unless you have an amazing track record, don't expect a regional bank to jump at the chance to finance a flip. You may end up working with a private corporation, and this means they might not be FDIC-insured.
Most lenders won't take on the full costs of buying and renovating a house. They want you to have some skin in the game, so there might be about 10 percent of the purchase price left out. Make sure you can pay the difference out of pocket.