Fix and flips are worthwhile projects if you can make them work. A large part of that is doing the research, and getting yourself ideally positioned to make a purchase as soon as you can. That might mean acquiring hard money funding from a direct hard money lender.
Choosing a property for a fix and flip project should entail a lot of thought, not just about the property itself, but also about the finances involved. If you do not carefully map out whether or not you can afford the project, and whether or not it will be worth what you think it will be once you have rehabbed it, you could find yourself stuck with a big loan and a worthless property.
That’s not even counting the time and effort you sank into the project. Fix and flips are getting harder to pull off, owing to a competitive market and fewer properties available. Follow these tips, however, for all the info you need to choose the right property and the right financing.
Finding a Property to Buy
In some cases, it really is as simple as finding a foreclosed property and snatching it up, but there is usually a bit more work involved in finding a fix and flip property. Short sales and foreclosures are not as prevalent as they used to be, in some areas, so there are fewer choices.
ATTOM Data Solutions said in its Midyear 2017 US Foreclosure Market Report that 428,400 US properties showed foreclosure filings (default notices, scheduled auctions or bank repossessions) in the first six months of 2017, down 20 per cent from the same time a year prior and down 28 per cent from two years prior.
“With a few local market exceptions, foreclosures have become the unicorns of the housing market: hard to find but highly sought after,” said Daren Blomquist, senior vice president with ATTOM Data Solutions. “More than 38 percent of properties sold at foreclosure auction in the first half of this year went to third-party buyers rather than back to the bank — the highest share we’ve ever seen going back as far as 2000, the earliest this data is available.”
“Although foreclosures are fading overall, there has been a notable an uptick in foreclosures completed by some nonbank entities — counter to the sharp downward foreclosure trend among big banks and government-backed loans,” Blomquist said. “These divergent foreclosure trends are likely the result of the big banks and government agencies selling off distressed loans over the past few years to nonbank entities that are now foreclosing on an increasing volume of that deferred distress.”
At the same time, in Q1 2017, “Home flippers financed an estimated $3.5 billion in purchases for homes flipped during the quarter, up from $3.3 billion in the previous quarter and up from $2.4 billion a year ago to the highest level since the fourth quarter of 2007 — a more than nine-year high.”
What does this mean for you, as someone looking for a fix and flip property? Mainly, you are going to have to spend more time and effort digging for a suitable home to buy, and, when you find the right home, you will be competing with many other would be flippers, many of whom have financing in place.
So, in order to track down the right property, you might have to try some less conventional search techniques. One option is to drive around and look around a neighborhood for properties that seem like they could be rehabbed.
Overgrown yards, broken windows, burned out lights, etc. can be a good indicator of a property that is not in decent shape, and by obtaining the owner’s information through a tax assessor you can approach him or her about purchasing the home yourself, or use a realtor to reach out to the owner.
It is important to center your search in neighborhoods that are still generally in good shape, as the property value will reach that of the neighbors — a good home in a worsening neighborhood will not have as much value in the future, and could be a big waste of your money and time.
Properties suitable for fix and flip are often sold as is, so, as the buyer, you are responsible for fixing up any issues. So long as you are able and ready to fix these problems, these homes are generally far less expensive than turnkey homes, so this is a good indicator of a potential flip property.
Conventional lenders may not fund a property with major health and safety issues, but this should not dissuade you. A money loan obtained through hard money funding is perfect for this situation. When it comes to hard lending, the property is the collateral, and a direct hard money lender will look at the potential value of the rehabilitated property to determine the value of the project.
When you have a property in mind, move quickly on financing. A hard money lender can help you make an offer fast, rather than having to wait on a conventional loan to go through. Direct hard money lenders know exactly what needs to happen to win in the competitive fix and flip market, and they have the money loan in hand already rather than having to wait for it to come through a third party. This is also more attractive to banks who are selling foreclosed homes, as they do not want to entertain any contingencies on your offer.
Money Loans and Exploring Your Financial Situation
For experienced fix and flippers, there is usually money to play with, as each sold property is more money in the bank. If you are just starting out, however, you must consider your full financial situation, and how you will be able to afford that initial property.
When looking at a property, think about the asking price, and research what it could go for once it is in great shape and ready to flip. There are a few options to determine whether a property is an excellent choice, financially.
The 70 Per Cent Rule
The 70 per cent rule says that you should pay 70 per cent of the after repair value of a property, minus the costs needed for the fix and flip rehabilitation. Working backwards from the after repair value, you can determine if the property is worthwhile, and whether you can afford it.
This is a good rule of thumb, but does not have to be something you stick to exactly. The key is to be aware of what costs will be involved with the fix and flip, and how much that could cut into your final profit.
Costs to Consider
Buying the property is, of course, a significant cost, and so is repairing it, but there are other hidden costs to consider.
Your own time and effort should be repaid, so consider what your hours are worth, and how many of them you will have to put into the project.
Think about costs such as recording and closing fees, insurance and taxes, appraisal, etc.
When you go to buy, and to sell the house you may have to pay for an inspection, as well as any fees to your realtor.
During your ownership, you will be on the hook for utilities, HOA fees, yard maintenance, and any other carrying costs that apply.
You may need a lawyer to help buy/sell the home, so legal fees could apply.
Finally, consider the interest rate of the loan you are using to buy the home. Hard money funding is ideal for fix and flippers as it is a money loan that is easy to get and fast-moving, but the interest rate is generally higher than a conventional bank loan, so factor that in.
Choosing the Right Hard Money Funding
Hard money funding is only as good as the money lenders, so when you are choosing to pay for your fix and flip with hard lending, pay as much care to finding the right money loan as you do to finding the right property.
A direct hard money lender is ideal. With direct lending, the money loan comes through the lender, without having to wait on any kind of middle man to provide it. A direct hard money lender is not a broker, and they have full control over what money is available to you, and how quickly you can access it.
Getting started with hard money funding generally begins with pre-qualification. A direct hard money lender is not like a traditional bank, in that they are not looking as much at your own personal financial situation as they are looking at the property value of the home you will be rehabbing, and what it could be worth in the future. Your credit score, assets, etc., are not factored in as heavily. Hard money lenders are ideal for those who have been turned down by traditional banks for this reason.
After you have consulted with a direct hard money lender and your finances are approved, you can go ahead and seek out a fix and flip property. With one in your sights, you need to provide information such as the address, the asking price, and information that sheds light on what the eventual value could be, such as cost of repairs, and the property value of neighborhood homes.
The hard money lender will approve or deny the loan under specific terms, and if it is all agreeable, you will close on the loan much the same as you would close on a conventional loan. The difference is, with hard lending all of this happens far more quickly, so that ideal fix and flip home does not get sold out from under you!
Common Mistakes in Choosing Properties and Rehabbing
You know you want to fix and flip, and you know a hard money loan will help you greatly in accomplishing that goal. Still, you could accidentally fall into some of these common pitfalls with choosing a property and starting your rehab, if you are not careful.
It is very important to have all of the money you need. Running out of money means your project grinds to a halt, and spending too much means that you do not get much of a profit when your fix and flip sells.
With hard lending you can have up to about 90 per cent of the purchasing cost on hand, and can potentially have the repair cost rolled in, so you will know exactly what you have to work with. Budget it properly to make the most of that hard money funding.
Choose a property that is manageable. All fix and flips require work, but know the difference between a property that will require a full gut job, and one that is less time-consuming. You will be the one who knows how much you can handle, in terms of time, money, and effort, so choose accordingly to avoid getting overwhelmed.
Similarly, choose a property that has rehab needs that are in your skill set, or that you can afford to hire out, to maximize your time and money. If you need to hire pros for everything you will possibly run out of funding faster than you thought, but if you need to DIY it all you could get in over your head. Sweat equity is key in a successful, profitable fix and flip, overall, so get ready to do some work!
Have patience and wait for the right home, the right contractor and the right time to buy. Do your research, especially in regards to direct money lenders and how they can help.
With the right choices, the right financial backing, and the right market, you can certainly turn a distressed property into something that will make you money.