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What Is a Fix & Flip Loan?

What Is a Fix & Flip Loan?

Fix-and-flip loans are short-term loans used by real estate investors to purchase and improve a property to then sell for a profit. These improvements range from minor renovations to a complete reconstruction of an existing home.

These loans are used exclusively for residential real estate investments, so renovating a school, for instance, would not qualify for this type of funding. In a fix-and-flip project, the property is often purchased from MLS, off-market, at auction through a foreclosure or a bank short sale.

A buyer may later try to sell the property “as-is” or may choose to add value by improving on the property before selling it. This is where fix-and-flip loans come in. When a buyer decides to upgrade and resell the property for profit, fix-and-flip loans are typically used to cover a portion of the purchase price and a majority of the costs of renovating the property.

There are several different fix-and-flip projects. Oftentimes, fix-and-flip investment offerings are diversified and can include the following:

  • Purchase: A borrower has the opportunity to purchase a property from a distressed seller at a deep discount and put it back on the market with some minor renovations.
  • Renovation: A borrower has the opportunity to purchase an old single-family house, for example, and renovate it to make it more appealing before quickly putting it on the market to sell.
  • Construction: A borrower has the opportunity to purchase vacant land with a dilapidated single-family house on it, demolish it and replace it with a 2-unit residential house, with the intent to sell it. 

Advantages of Fix-and-Flip Loans

The demand for fix-and-flip loans generally stems from capital inefficiencies in the current lending marketplace. These relatively short-term loans create opportunities for investments that potentially provide attractive yields for investors. In addition to this, fix-and-flip loans have other benefits:

  • Secured Investment: The real estate serves as collateral, whether that is the property or land involved in the offering. In case of a default, the lender could take ownership of the collateral. 
  • Short Duration: Fix-and-flip offerings are short in duration–typically 12-24 months–and there is no penalty for repaying the loan early.
  • Diversification: Fix-and-flip offerings have low stock market correlation, making them potentially good options for diversifying traditional portfolios.

Where to Obtain a Fix-and-Flip Loan

There are many factors that go into what makes a successful fix-and-flip. The buyer must be knowledgeable about the market, able to source properties at an appropriate price, able to assemble and manage a team to efficiently execute improvement plans, and able to obtain funding to finance the project. 

Sometimes, however, there are situations in which obtaining a loan from a bank or traditional lender may take too long or be too costly for the borrower. Additionally, the circumstances surrounding fix-and-flip investments may fall outside of the stringent requirements for bank loans.

Here are some reasons why traditional bank loans may not be the best option for fix-and-flip investors:

The buyer is typically purchasing a distressed property. Since this is by nature opportunistic, there is often a need for expedited financing. Bank financing generally has lengthy application processes which can be too time-consuming for this type of project.

Banks and traditional lenders heavily weigh the buyer’s credit history and may discount the buyer’s expertise in fix-and-flip and/or the opportunity presented. 

Types of Fix-and-Flip Loans

Conventional sources of financing may be reluctant to lend toward the improvement costs of a fix-and-flip.

That said, there are a variety of alternative financing options for buyers looking to obtain fix-and-flip loans. Depending on the investor’s experience and financial circumstances, they can choose between different types of real estate lending options with varied interest rates, fees, and qualification requirements. 

Though there are more to choose from, these are two popular financing options:

Hard Money Loan

A hard money loan is a short-term financing option, with terms ranging from a few months to a few years, where the real estate serves as collateral. They tend to have lower qualification requirements and higher interest rates, averaging around 8-14%, plus points.

These points are a percentage of the total loan amount. If the points are equal to 2% of the loan amount, a borrower requests a loan of $100,000, the borrower would pay $2,000 in addition to the principal and interest payments.

One advantage for fix-and-flip investors is that borrowers looking to expedite the process often gain quick access to funding with hard money loans–often much quicker than traditional funding options. As hard money loans require lower qualifications, even borrowers without a proven track record may be able to do this. Additionally, there are typically no prepayment penalties for paying off the loan as quickly as possible. This allows the borrower to purchase, renovate, and sell the property as quickly as possible.

Costs of Flipping a Property

Outside of the renovation and construction costs themselves, flipping a property can hold hidden costs. While each property and project is different, there are inconsistencies in the types of costs investors are likely to encounter. As a general rule, expect to cover the following expenses when taking on a fix-and-flip:

  • The property’s purchase price
  • Selling costs such as Realtor fees, staging, and closing costs
  • Holding costs including HOA fees, utilities, and insurance payments
  • Renovation/construction costs

Understanding these costs and having an accurate estimate in mind will be beneficial when applying for a fix-and-flip loan. 

Asking for an inaccurate amount could slow down the entire renovation process or lead to unnecessary debts, so be sure to crunch the numbers before requesting your loan.

One Comment

  • I like how you mentioned that the buyer must be knowledgeable about the market it is one of the factors that go into what makes a successful fix-and-flip. My cousin mentioned to me last night that he is planning to invest in real estate and asked if I have any idea what is the best option to do. Thanks to this informative article and I’ll be sure to tell him that he can consult a well-known fix and flip line of credit company as they can answer all his inquiries.

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