Flipping houses can be a lucrative endeavor, especially with the proper timing and financing. Quick turnaround is key, since time is quite literally money for flippers. Fix-and-flip loans are specifically designed for this type of real estate investment. They provide funds for renovation quickly, sometimes in as little as one business day. But how, exactly, do fix and flip loans work? What are the specific terms and requirements? Read our article to find out.
What is a Fix and Flip Loan?
A fix and flip loan is, in essence, a small business loan that flippers use to purchase a property, renovate it, and resell it for a profit. Fix and flip loans may also cover the costs to list and sell the home, such as realtor and closing costs.
How Do Fix and Flip Loans Work?
Your fix and flip loan terms and requirements will vary depending on your lender. In general, fix and flip loans are based on one of two figures: the loan-to-value (LTV) ratio, and the after-repair-value (ARV).
An LTV ratio compares the loan amount to the actual purchase price of the property and awards a percentage based on that ratio. These types of loans typically do not exceed 90 percent of the LTV. For example, if you want to buy a home to flip that costs $150,000, and your lender agrees to a 90% LTV, you would be awarded $135,000. The remaining $15,000 would be your responsibility and act as a down payment.
ARV loans are far more common in the fix and flip business. These loans are calculated based on a professional appraisal of how much the home will be worth after renovations. Although the percentage loaned is less (no more than 70 percent), you can often borrow a larger amount with an ARV loan. For example, if the home you are renovating is appraised at $300,000 and your lender agrees to 70 percent ARV, you can borrow $210,000.
How to Qualify for a Fix and Flip Loan
Determine How Much You Need
Your first step in acquiring a fix and flip loan should be to determine reasonably how much you will need to borrow. You will want to carefully research the cost of the renovations you wish to do, including detailed projections for materials, labor, etc.
Review Your Financial Status
You will have several options when it comes to the terms of your fix and flip loan. These loans can present as various types, from hard money loans to business lines of credit. Your eligibility will ultimately be based on your current financial standing. Among other factors, lenders will look at your credit score, debt-to-income-ratio, past flipping success rates, and down payment amount.
It will be wise to work with a certified accountant to give you a clear understanding of your financial situation before you attempt to borrow money for your fix and flip loan. This way, there will be no surprises on either side when it comes time to sign a contract.
Find a Good Lender
Research local, well-respected lenders that have ties to the community. You want to compare several lenders to ensure you are receiving the most competitive rates. It can be useful to talk to other flippers in your area to see which lenders they have worked with.
Pinetree Financial Partners is a leading fix and flip lender in the state of Colorado. We work with all sorts of real estate investors and offer competitive interest rates and exceptionally fast processing times. We offer up to 70 percent ARV, even for inexperienced flippers, and we require no appraisals within the Denver Metro area. Contact our office today to get started on your next project.