For many individuals looking to break into the real estate investing business, one of the first avenues they consider – thanks largely in part to popular home makeover television shows – is flipping houses. These programs generally feature highly successful flippers with years of experience and funding readily available. What they don’t show you is what the beginning stages of breaking into the industry actually entail – such as securing rehab or fix and flip loans, developing relationships with trusted contractors and real estate professionals, and getting their own hands dirty doing a lot of the work themselves to ensure they make a profit on the project.
When looking into financing for these projects there are a couple of different routes that a potential developer or flipper can take. They can either try to take out a traditional mortgage with a bank, they can try to secure private funding from an individual, or they can secure a hard money loan – sometimes referred to as a rehab or fix and flip loan – from a real estate investment firm. As they begin their research they’ll often come across the terms “rehab loan” and “fix and flip loan” and may wonder what the difference between the two is.
Rehab or Fix and Flip Loans – Which One Do I Need?
Truthfully… there isn’t a difference between the two! For the most part, it’s all simply a matter of preference (or marketing) for the firm providing the financing. In markets where there may be a lot of historic homes being restored a lender may opt to refer to the loan as a “rehab loan,” whereas in an area where single family homes are being updated and put back on the market they may call them “fix and flip loans” simply because that’s the typical language their borrowers are using. The biggest factor in determining whether a rehab or fix and flip loan is right for you is examining the property you’re planning to flip/develop, the current market, the offered rates, and what best suits your needs.
For many individuals looking at rehab or fix and flip loans, traditional mortgages aren’t an option. That’s because large financial institutions will look at the proposed purchase price and the appraised value of the house and will not lend on a property that has a purchase price or a requested mortgage amount over the appraised value. In some instances, they may be willing to approve the loan for only the purchase price for the property if it’s in reasonably good condition and the purchase price is appropriate for the market, but for many flippers – especially those just starting out – that won’t help them fund the actual "fix" portion of the project in a timely manner, which defeats the purpose.
That’s where rehab or fix and flip loans come into play. With these types of loans, lenders are looking at the big picture – the purchase price of the property (which would ideally be below market value), the proposed work to be done and the estimate cost of that work, and the potential resale value of the property (which should be high enough to cover both the renovation costs and the purchase price while also allowing the borrower to make a small profit – although that last bit isn’t really the bank’s concern). On these types of funds, the loan terms often include a higher interest rate and a shorter duration than a traditional loan, since the entire purpose of the loan is to get the property back on the market as quickly as possible.
Another instance where a rehab or fix and flip loan becomes the best option for an investor is when time is of the essence. Typically, when properties that are suitable for flipping come on the market they’re scooped up pretty quickly due to the low sale price. A traditional (or conventional) mortgage can take a month or longer to close, which could put a huge bottle neck in an investor’s plans. With fix and flip loans you can typically close on a home within a week or two, which means that sellers will be more interested in the offer (sellers love closing quickly!) and borrowers won’t have to worry about losing out on the perfect opportunity to someone else who can simply move a little quicker.
Are you ready to begin your fix and flip journey with Walnut Street Finance? Get in touch and let’s get the process started!