Foreclosed and cheaply-priced properties are available all around the country, presenting a good opportunity to snatch up homes at rock bottom prices, rehab them, and sell them at a good profit.
A fix and flip is an excellent way to quickly make money from real estate, and with wise decisions, can be a long term investment or retirement strategy. If you are already involved in fixing and flipping, you can often use the money from your latest flip to invest in the next one, but for those who are just starting out and need a money loan of some sort, what are your options and why is hard money a good choice?
Read on to find out about the various types of money lenders and financing options and the benefits of hard money funding that many people miss out on because they just don’t know enough about them.
Hard Money and How to Fund your Fix and Flip
There are a few ways to get started with a fix and flip, whether you need a money loan or not. The common tactics are:
Cash Out Refinance
This option is available to those who can cash out on home equity through other properties, not requiring a money loan. It’s great for those who have the equity already, but not for those who are just getting started, or for those who still need a bit of extra funding on top of what comes from the cash out refinance.
Home Equity Line of Credit
This is a similar scenario as a cash out refinance — you need the equity to draw from it!
Traditional Bank Money Loan
This might be one of the first options that come to mind when seeking finance for your fix and flip project. It is very similar to getting a mortgage set up for your own home, but comes with similar drawbacks.
These drawbacks include the length of time it takes to actually get the money and the need to qualify for the money loan. It is not ideal for short-term investors. The slow closing period for a traditional loan can mean the difference between getting your hands on that fix and flip property, and watching it go to someone who is ready with money instead.
A traditional money loan also requires a lot of paperwork and financial hoops to jump through. These processes stall the purchase and if the seller is a bank, they prefer to make a sale that will sail through. These delays are expected for a traditional home purchase scenario, but for a fix and flip quick purchase, it is simply too much wasted time.
You also need to be aware that if you are buying a home that needs work — which is the usual goal of a fix and flip project — a traditional money lender may outright refuse to fund it if there are health and safety issues at play. While you intend to fix these issues to flip the home, a traditional money lender generally prefers to fund homes that are already fixed up and livable.
What can you do if all of these options are not ideal?
A Money Loan from a Family Member or Friend
This is financing that comes about by asking someone you know to put up the cash you need. You would have to network to find someone who can provide you with all of that money, and be aware that your relationship could suffer if things do not go as planned.
A private lender money loan from someone you know does have some benefits, but you can accomplish much the same from a hard money loan, without risking your friendship or family relationship, or having to ask around to find someone with that kind of cash.
Crowdfunding for Real Estate Money
A fairly new arrival on the real estate investment scene, crowdfunding involves asking online sponsors to invest in your real estate project. You will have to wait for your funding goal to be met, and you will have to meet whatever criteria the sponsor sets out.
Hard Money Funding
Hard money funding works on a simple premise — the value, or potential value of the fix and flip, is what a private money lender will provide to you for your investment. The qualification for this money loan comes solely from the property, not from you as the loanee, so your other assets, credit score, etc., do not matter as much as they do with a traditional bank loan.
An important aspect of the fix and flip industry: a private money lender can get you funds quickly, so you can get moving on your fix and flip right away. With hard money funding, you will find that the interest rate is higher than what you would get from a traditional bank. However, the loan term is generally much shorter — six months to a few years versus a long mortgage period — so you will not be carrying the loan for nearly as long.
The problems with other kinds of lending, and the advantages of hard money loans mean that when you need money for a fix and flip project quickly, working with a private money lender is becoming an increasingly popular choice.
Who is Using Hard Money Funding?
An ATTOM Data Solutions report shows that thirty-two per cent of homes flipped in Q2 2016 were financed, hitting the highest level since Q3 2008.
“Home flipping is becoming more accessible for smaller operators thanks to an increasingly competitive lending environment with more loan options for real estate investors, who are also benefitting from the historically low mortgage interest rates,” said Daren Blomquist, senior vice president at ATTOM Data Solutions. “That favorable lending environment for flippers has helped to fuel the recent flipping frenzy we’ve seen over the past five quarters.
There are still many foreclosed and bank owned properties on the market for fix and flippers to access with help from a private money lender.
RealtyTrac says bank repossessions “increased on a year-over-year basis for the third consecutive month, and scheduled foreclosure auctions have increased on a year-over-year basis in four of the last eight months. May REOs were 56 percent below the peak of 102,134 REOs in September 2013 but still nearly twice the average monthly number of 23,119 in 2005 and 2006 before the housing bubble burst in August 2006.”
“May foreclosure numbers are a classic good news-bad news scenario, with the number of homeowners starting the foreclosure process stabilizing at pre-housing crisis levels but the number of homeowners actually losing their homes to foreclosure still well above pre-crisis levels and on the rise,” said Blomquist, who is vice president at RealtyTrac. “Lenders and courts are pushing through stubborn foreclosure cases that have been languishing in foreclosure limbo for years as options to prevent foreclosure are exhausted or left untapped.”
With the number of undervalued properties available, and the competitive nature of buying these properties for a fix and flip project, it makes sense that many properties are being financed, as it is the best way to quickly and reliably purchase the investment property before anyone else can.
Whether it is a small and simple fix and flip plan, or a luxury home fix-up, hard money makes it happen.
Hard money funding is also being used by people who have been rejected for conventional bank loans, as the property value again weighs more heavily than any other factors like credit scores or assets.
Accessing Hard Money
One of the first steps in accessing hard money, when you know that is the route you are taking, is choosing a private money lender. Of course, it makes sense to choose a lender who specializes in hard money, as this type of lender knows all there is to know about funding investments without a traditional bank loan.
Structuring the hard money loan is up to the lender, so you will want one with skills in this area. Your private money lender also must understand and properly follow any legal regulations for hard money, making it all the more important that they have experience.
A private money lender with experience financing fix and flips, specifically, will also understand the tight deadlines, budgets, and property valuation attached to this type of project, versus the needs for buying a standard property that traditional banks often deal with.
Look for a direct lender, meaning a hard money lender who is funding loans through their own money, that is readily available. Lenders using ‘middle men’ to provide the cash will mean you are forced to wait longer for the money to come through. Direct lenders don’t need to make you wait before you can access that much needed hard money.
It is important to have a reputable hard money lender who will communicate with you if there are any issues, and you also need to be able to communicate with the money lender in turn. If there are any problems with the property or its financing, you should have a transparent conversation with your hard money lender to determine next steps.
Depending on your fix and flip project, you may be able to have your lender roll some of the repair costs into your hard money loan based on the projected value of your completed project. This is worth exploring with your lender if it is something that you could use to be successful.
To access hard money, you need to be able to provide your private money lender with all of the details they will need to approve your money loan. You can prepare a lot of this information in advance, including the address of the property, your own crucial deadlines, the purchase price of the property and its projected future value. The more information you have, and the more organized and ready to go you are, the faster your hard money loan can move.
It can be tempting to jump right into trying to get a fix and flip and the associated funding for it, but unless you have the experience and the assets to go ahead without professional advice and assistance, it’s better to dampen your excitement and get all the paperwork in place. Correctly assessing the work required on the property will mean that you don’t end up seeking further funds before the project is complete.
Hard money lending will not pay for every dollar you need for your fix and flip — while these hard money loans are quite generous, you will still need to top up the loan with some of your own funds. Still, this is often a better deal than the money you would have to put down for a traditional bank loan, so you will still come out ahead.
You can cut through all of the waiting, the red tape, and the frustration of getting a loan when you work with a private money lender. Just be aware that the process is different than what you may be used to from past experiences with traditional money lenders, so get ready to step into a different world when accessing hard money. Your hard money lender should be able to walk you through what it takes to get started, if you are new to this area of investment, and soon enough you’ll have what you need to fix and flip successfully.
Choosing a hard money lender may not be something you had considered previously, but when you find the right company to access a quick, effective money loan, you may come to realize that it is a better choice for your situation than going to the bank, even if it is a world of finances you had not explored in the past.
To get started on your fix and flip as soon as possible, with most of the funding you need, get in touch with a hard money lender to discuss your options.