Fix and Flip Loans
Fix and Flip loans are essentially short term loans for people looking to repair (fix) and sell on (flip) a property within a short period of time.
These type of investors broadly speaking are ideal candidates for rehab loans as the investment objective of the short term investor also matches favourably with the plus points of a hard money rehab loan.
One of the principle benefits of fix and flip financing is that the lifespan of a hard money rehab loan is generally twelve months, fitting in perfectly with the profile of short term fix and flippers who are looking to renovate quickly and sell on the property. Many of the houses that would be purchased at an auction for example would be financed with a short term rehab loan for example.
Another crucial plus point is that rehab loans can finance the purchase and renovation of assets in underpriced or poor condition, for example foreclosures. These are also referred to rehab construction loans. This is where they differ from loans for a conventional mortgage as they do not allow funding for renovations and stipulate that the properties must be in good condition prior to purchase. As previously mentioned rehab loans combine the costs of the initial purchase and the renovations in a single entity, simplifying things for all concerned.
House flipping loans on the whole will state that the payment is paid back in full at the end of the loans life (as stated, this is normally twelve months). Many of these loans will also offer interest only payments, so whilst the rehab loan will naturally have higher interest rates than the average mortgage, the monthly repayments may be lower.
Hard money lenders will have a selection of criteria to determine the ARV, or after repair value. As the name suggests this is the estimated value of the property once all the rehab and renovation has been completed on the property. Private hard money loans take into consideration factors such as the cost of the repairs and the projected value by doing sales comparisons with similar properties in the neighbourhood. They will also conduct two appraisals, one informing the real estate investor the current market value of the property and one stating the projected value once the renovation has been completed.
If an investor needs to purchase a property before selling an existing property they may want to consider a bridge loan. The flexible bridge loan is attractive to buyers as they allow you to purchase a new home without having to sell first. They are secured by the individuals existing home and the new funds can then be used as a down payment for the new residence. Applicants for a bridge loan will, in most cases have an existing first mortgage on an existing residence, they will then close the purchase of a new residence before selling their existing one, meaning for a certain timeframe they will own two properties.
Principle benefits of these types of loans are the buyer can immediately put their home on the market and make a new purchase without any restrictions. They may also not require monthly payments for a few months. Conversely it must be noted that these types of loans cost more than home equity loans.