Everything You Need to Know about Fix and Flip Loan Requirements
Real estate investments are always profitable. But most people think that they should have hundreds of dollars in their bank accounts to get into the industry. This fact is not true at all. One of the easiest ways available to get into the real estate market is to fix and flip houses. This is where you buy rundown houses, repair them, and sell at a higher price. If you don’t have enough money to buy a rundown house, fix and flip loans are there to help. Continue to read this article and we will share everything about fix and flip loan requirements.
What are Fix and Flip Loans?
Fix and flip loans allow real estate investors to purchase and renovate distressed properties before reselling them for a profit. These loans provide the capital needed to buy and rehab properties that may not qualify for traditional financing. However, lenders have strict fix and flip loan requirements borrowers must meet to get approved. Understanding these requirements can help investors present themselves as qualified borrowers able to successfully execute fix and flip projects.
Types of Fix and Flip Loans
There are several common types of loans used for fix and flips. Let’s take a quick look at the different loan options available.
Hard money loans - Issued by private lenders and secured by the property itself. Hard money loans typically have higher interest rates and costs but quicker approvals and funding than bank loans.
Bridge loans - Short-term loans designed to bridge the gap between purchasing a property and selling it. Bridge loans are usually paid back after 6-12 months when the renovated property is sold.
Construction loans - Specific loans to fund building and renovations with future disbursements tied to project milestones. Construction loans convert to longer-term mortgages after projects are finished.
Home equity loans/lines of credit - Allow investors to tap equity in other owned properties to fund fixes and flips.
Loan Qualification Criteria
When it comes to fix and flip loans for beginners, most get confused with eligibility criteria. Even though there are different loans for flipping houses, requirements remain quite similar. Let’s take a look at them.
Loan-to-value ratio (LTV) - Lenders want sufficient equity cushions to secure loans. Typical LTV ratios range 50-70% depending on the lender and deal specifics. Lower LTVs demonstrate less risky deals.
Experience - Most lenders require 1-3 years of house flipping experience and completed projects before approving loans. More experience signals lower risks.
Project plan - Detailed project budgets, timelines, costs and projected profits must be presented. Realistic plans increase the chance of approval.
Exit strategy - Lenders want to see how borrowers intend to sell for a profit after completing renovations. Most require properties to be resold within 6-12 months.
Collateral - Additional assets like other properties, equipment, savings accounts or stocks and bonds may be pledged as collateral. More collateral equals better loan terms.
Credit score and history - While credit standards are typically lower than conventional mortgages, fix and flip lenders still check scores and credit histories for red flags like bankruptcies or foreclosures. Higher scores get better rates/terms.
Typical Documentation Needed
In addition to completing loan applications and paying fees, borrowers should expect to provide few other documents. Here are the additional documents you should submit for house flipping loans.
Scope of work - Detailed descriptions of all planned improvements and repairs. More specificity is better.
Cost estimates - Written estimates from licensed contractors supporting all projected rehab costs.
Comparable property analysis - Research on recently sold comparable fixer properties supporting projected valuations and profits. Higher profit margins get funded more easily.
Current financial statements - Including personal/business tax returns, income statements, balance sheets and bank account records proving consistent income streams and cash flows.
Project budgets and schedules - Projections demonstrating costs, expected profits, project timelines, draw schedules and more. Conservative underwriting helps.
Preparing to Meet Fix and Flip Requirements
While fix and flip requirements vary across lenders, most analyze the same key criteria when funding projects. Investors can begin preparing to qualify even before finding specific properties by taking certain steps. Let’s take a look at those steps, before learning how to get a loan to flip a house.
· Build Fix and Flip Track Record
Getting funded for a first fix and flip project can be challenging. Having experience completing other renovations demonstrates skills, even if on owned properties. Document all projects with before/after images highlighting quality work.
· Boost Credit Score
Lenders may approve borrowers with scores around 600 but better terms go to higher scores. Pay down debts, resolve errors and avoid new credit before applying. Each extra 20+ points can equal thousands in savings.
· Grow Reserves
Liquid reserves covering 6-12 months of living expenses are ideal. Bank and brokerage statements showing consistent account histories reassure lenders.
· Create Business Structure
Lenders often prefer lending to entities like LLCs versus individuals. Form a separate entity to isolate liability risks before requesting financing.
Determining Optimal Financing
Securing funding is critical for any fix and flip. But choosing the wrong loan can consume profits through higher rates/fees. This is why you should go for optimal fix and flip loan Minnesota. Here are few tips that can help you with it.
· Available Equity - More equity allows better loan-to-value ratios. Leverage owned properties if needed as additional collateral.
· Cost of Capital - Compare interest rates, points, fees across hard money loans, HELOCs and other products to select affordable financing.
· Speed - Hard money and bridge loans fund faster than construction loans tied to draws. But they cost more. Evaluate project timelines and holding costs when choosing loans.
· Loan Terms - Will the property sell within the 6-12 month repayment window? If repairs go slower than expected, secured credit lines allow more flexible repayment options.
Evaluating Potential Fix and Flip Properties
Experienced investors carefully evaluate deals before finalizing purchases to avoid overpaying. Follow these tips when you asses fix and flip properties.
· Research Market Trends
Target areas with rising property values based on recent comparable sales of renovated homes. This ensures sufficient room for profits after completing projects.
· Verify Allowed Uses
Confirm municipal zoning codes permit the planned end use and renovations before buying multifamily, commercial or specialized buildings.
· Inspect Before Committing
A general contractor should estimate total renovation costs from necessary structural/system repairs down to cosmetic touchups after a professional inspection uncovers all deficiencies.
· Model End Value
Work with an experienced real estate agent to determine realistic resale values post-renovation based on improved finishes, updated systems and local demand. Conservative projections help avoid losses.
Assembling a Fix and Flip Team
From contractors to real estate agents, a talented fix and flip team vastly improves results. Look for specialists with proven records of success completing similar renovated projects in the local market. Invest time vetting referrals to assemble the best talent within budget.
Key Team Members May Include:
· General Contractor - Oversees all workers and projects from start to finish
· Specialty Trade Contractors - Electricians, plumbers, masons and more
· Real Estate Agent - Provides accurate comparable valuations and markets/sells end properties
· Property Inspector - Identifies all required repairs upfront so no issues get missed
· Title Company - Research property/deed records to uncover risks
· Attorney - Drafts contractor agreements and closes sales
Securing the Best Fix and Flip Property Deals
Finding profitable fix and flip opportunities begins with identifying discounted properties with potential. Follow these tips to score good deals.
· Seek Distressed Sellers
Owners facing foreclosures, relocations or divorces are often highly motivated. They lack time and money for repairs. Offer quick cash closings in exchange for bigger discounts.
· Focus on Emerging Neighborhoods
Buy in areas attracting buyer demand through new investments like parks, businesses and infrastructure. Improved amenities coupled with lower purchase prices maximize profit upside.
· Consider Small Multi-Unit Properties
Duplexes and triplexes offer more potential units to sell post-renovation. Rent extra units meanwhile to offset carrying costs if projects run slower than expected.
· Leverage Local Investor Networks
Connecting with active rehabbers and wholesalers in a particular market often leads to first looks at new deals. Check clubs, associations and REIA meetings to build a power network.
· Practice Distressed Property Negotiation Tactics
The way investors present offers can make or break deals. Highlight aspects like flexible timelines, waived contingencies and rent-back options to beat competing bids while still protecting positions.
Creative Fix and Flip Exit Strategies
Too often investors only consider selling renovated properties via mainstream MLS listings. But expanding exit strategies opens up more possibilities to profit. Alternatives may include:
· Selling to other investors - Many rehabbers prefer acquiring turnkey rentals and may pay above retail prices.
· Owner financing deals - Carry backend notes at favorable rates to creditworthy buyers rather than selling for all cash up front.
· Lease-option agreements - Blend aspects of rentals and sales through long term lease agreements with options to purchase once tenant finances improve.
· Delayed closing transactions - Let buyers purchase properties as-is with flexibility to close once renovations hit milestones that support the final sales price.
· Listing on alternative platforms - Sites like Roofstock enable investors to sell quicker to certified vetted buyers willing to pay premiums for instant access to renovated inventory.
The most successful fix and flip investors explore multiple exit vectors so deals never get stuck without buyers. Preparing contingency strategies in advance allows adapting to changing market conditions and buyers.
Finding the Right Fix and Flip Loan
With strict requirements, finding the right loan is important to execute profitable fix and flips. Connecting with an experienced fix and flip hard money lender or mortgage broker is the best way for investors to get funded quickly and smoothly. These specialists match investors to lenders most likely to approve loans based on credentials of the borrower and the specifics of individual fix and flip projects. This experience and expertise goes a long way toward securing capital under the best possible terms.