Fix & Flip Loans

What is a fix and flip loan?

A fix and flip loan is a short-term loan (usually between six months to two years) to buy an uninhabitable piece of real estate and improve it so that it becomes habitable, and then either resell it or refinance the fix and flip loan into a more long-term loan. “Habitable” is a legal concept that is defined in local building codes. It usually includes having a working bathroom and a working kitchen, and a space for sleeping that is free of leaks, and other health and safety requirements.

The key with fix and flip loans is that they are used for properties that are not currently habitable (and therefore, often a really good deal in terms of purchase price). The fix and flip loan covers both the purchase price of the property and the costs of renovation.

Note:

If you are looking to buy a property that is already habitable and simply needs some renovation so that it can be resold for a better price, other more favorable loan options may be available to you, including a DSCR loan to buy the property and a second mortgage on top to cover renovation costs.

Alejandro with Detlef, an actual client and experienced contractor in West Los Angeles, with photos of his fix and flip project below.

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After

Before

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Which lenders provide fix and flip loans

Alejandro Szita, Mortgage Broker & President of Prosperity Lending

The good news is that there are a few specialized institutional lenders in the market who do provide fix and flip loans, and they charge lower interest rates than hard money lenders. These institutions are not direct lenders; you need to go through a mortgage broker to have access to their loan programs.

At Prosperity Lending, we provide access to several institutional lenders that provide fix and flip loans. We also broker hard money loans when needed.

The process of getting a hard money loan is usually faster, and the documentation required is a little looser than with an institutional lender. But the institutional loan is going to be less expensive.

In both cases, the lender is going to have certain basic requirements for a fix and flip loan.

How to qualify for a fix and flip loan

The number one requirement a fix and flip lender is going to have is a borrower who has at least done three of these projects in the last three years or so (exact number of years depending on the lender). They want to make sure that you are able to take on those projects. And in Southern California, which is where we do those loans it's not just a matter of building or remodeling. You have to deal with the cities and the municipalities and the building and safety departments, and they can be quite cumbersome in the sense of what they require, in all of the forms and administration and rules that you have to follow. And then even if you do all that, many times they need to send an inspector to check on the property, which can involve costly delays, and there are a myriad of problems that can surface once you tackle one of these projects.

So the number one prerequisite is experience. If you are a real estate investor and you don't have the experience, you can solve that by hiring or partnering with someone who has the experience.

Similarly, if you have the experience but you don't have the cash, you can bring on a cash partner.

Legal entity and paperwork requirements

If you are going the hard money route, you will not need to have a formal entity. If you have partners, each partner can sign the loan documents as an individual. In general, less paperwork and documentation is required with hard money lenders.

However, if you are applying for a fix and flip loan with an institutional lender, they will require that you and your partners on the project are formally organized into a legal entity such as an LLC, and they will require extensive formal paperwork and documentation as part of the loan application.

Down payment

Fix and flip loans usually require a down payment of 25-35%.

Credit score

On a fix and flip loan, lenders usually require at least one of the partners in the project to have a credit score of 660 or higher. Also, they will want to see that you don’t have lots of collections on your credit report.

There are some lenders that might give you the loan regardless of your credit score. However, the fees, rates and closing costs on those loans will be a lot higher.

Budget

When you get a fix and flip loan, you are getting a purchasing loan and a construction loan all in one. To complete a fix and flip project successfully, time management and advance planning is crucial. The lender is going to ask you for a very detailed, formal budget. This budget has to be very well thought through because the lender is going to subject you to it, and the lender is going to disburse the construction funds in stages as the work on your budget gets completed. This budget needs to follow a specific format, which we will supply.

What happens if things don’t go as planned

If for some reason, things don’t go as planned and you cannot pay the fix and flip loan, your best path is to immediately contact the lender and try to negotiate a workout.

It could be that you ran out of money. It could be that the city has made you wait so long for a particular permit that now all of your calculations and all of your assumptions need to be reevaluated, or it could be that you ran into an obstacle that you are not prepared to deal with, and now you have to sell the project to another investor or to another developer who will finish it.

This happens quite frequently. I would say that about a third of fix and flip loans don't go as planned, and about a fifth or 20% of them get repossessed. And this is why, in a sense, the fees are high because now the lender needs to foreclose on the home and they need to find someone else to finish the project.

But one thing that is not very well known is that lenders are not in the business of foreclosing and repossessing. Repossession and reselling is risky, and in most cases, any sales proceeds that go beyond the borrower’s debt have to be returned by the bank to the borrower. Additionally, foreclosure is something that costs lenders a lot of money, distracts them from their main line of business, and it's simply something they don't want to have to deal with. So a lender will do everything they can in order to lend to a candidate that they believe will be able to complete the project successfully.

Do all the calculations beforehand

One more word of caution is: when you do your fix and flip, always get the services of an experienced realtor as part of your planning phase. You don't want to miscalculate or misjudge the price at which you will be able to sell the home when the renovations have been completed. Try not to be at the top of the neighborhood; try to be a little below. We recommend not going over 75% of the average value of the neighborhood because if something goes wrong, the economy goes down or the economy is very volatile, you want to have a cushion in case those home prices turn out to be lower than expected when you are ready to resell.

In summary

In summary, the fix and flip loan is a loan suited for a professional real estate investor or fix and flipper (team) that has the experience to take a subpar, uninhabitable property and bring it up to a marketable condition. That person or team also has the money for the down payment (at least 25%) and has an adequate credit score (660 or more).

As a final note, when done well, fixing and flipping can be very lucrative and is incredibly valuable to communities. Fix and flippers do great work that adds to the stock of desirable homes available. That is so sorely needed, especially now that there is such a big deficit of homes in many areas.

We will do everything we can to help. Feel free to ask any questions, and we hope to be your partner in your next venture.

You can give us a call at 310-294-9417 or self-schedule an appointment online.

“Thanks to the loan I got, I am expanding my business, and the future looks promising in ways I didn’t think possible.”

—Merilyn, Client

Fix and flip loans are usually done by private lenders, meaning small businesses or private individuals. Big financial institutions are usually not very interested in doing fix and flip loans, because: a) they are short-term loans that don’t earn the lender a lot of interest, b) if the project is abandoned in the middle for whatever reason, it is difficult to sell an unfinished home to recover the loan amount, c) the risk of loan default is higher than with “regular” real estate loans, and lenders don’t like the hassle of having to foreclose on properties.

Fix and flip loans from private lenders are called “hard money loans.” These are brokered by hard money brokers, or sometimes they are provided by “direct hard money lenders,” companies that have their own funds that they lend out as private loans. Hard money loans have a higher interest rate than regular real estate mortgages, and hard money lenders also charge an additional fee in the form of a percentage of the loan amount (usually between 2 and 4 percent).