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Fix and flip loans in Los Angeles

Fix and flip loans in Los Angeles

Fix and flip loans in Los Angeles aid real estate investors in financing investment properties and increasing their profit potential. Given an array of financing options, using fix and flip hard money loans lead in strengthening real estate opportunities, particularly in completing property purchases at a short amount of time.

As a real estate professional, it is important to understand the following key concepts about this money loan system to achieve success in real estate deals:

  • Definition
  • Process
  • Benefits
  • Requirements
  • Interest rates
  • Common terms
  • Down payment
  • Application process

What is a fix and flip loan?

A fix and flip loan is a short-term loan used by real estate investors to fix a run-down property and flip it to a higher value in order to invite a strong potential profit.

In other words, the loan is used to buy and upscale distressed properties, making them ideal for reselling and eventually, generating returns. According to Tricia Jones of Fit Small Business, residential properties in auction or foreclosure are the main target of property investors in this scheme.

Unlike a traditional loan which is typically offered by a bank, this short-term mortgage loan offers higher interest rates. Despite this, experienced flippers pursue this financing option because they consider it a quick source of capital they take can advantage of in funding the purchase price, renovation costs, and construction costs of their desired real estate properties.

Additionally, when it comes to short-term loans, private lenders can be the most ideal lender of choice. This is because they offer investment property loans in a smooth and easy transaction. However, while most people often perceive that private money lenders provide 100% loan amount for real estate projects, in reality, this is not always how it works.

How do fix and flip loans work?

Fix and flip loans work by either of these two credit options: a term money loan or a line of credit. 

According to Amy Fontinelle of Investopedia, a term money loan refers to a lump of sum that the borrower can claim one time and then pay off for a period of time. Meanwhile, a line of credit is allowing the borrower repeated access to an amount as long as it does not exceed the credit limit. Once payment has been made, the credit line refreshes and this can be used continually by the borrower.  

The borrower’s credit history as well as credit score play a crucial role in the approval of the private loan and in determining the loan term. Experienced flippers, compared to novices, are particularly given a priority in accessing money flip loans since their profit potential is critical in paying private money loan. 

What are the benefits to a fix and flip loan?

The benefits to a fix and flip loan can be classified as follows:

Offers flexible terms

Private money lenders do not ask for a long list of stipulations in the loan process. As a result, the transaction can be completed smooth and easy. This condition is contrary to traditional lenders who form strict terms of policies and regulations, making the loan process longer and more strenuous. 

Provides quick approval

Fix-and-flip financing provides approval to short-term loans in just a few days. Plus, the closing period can last from seven to ten days only. This gives the edge in grabbing ideal property types and compelling prices from the real estate market. 

Allows pre-payment without penalty

Banks penalize borrowers from paying off their loans before they are due. With private money lenders, debts can be paid off in full before the due date without paying an extra cost. Consequently,  property owners experience the joy of financial freedom.

Covers different type of property

Fix and flip hard money loans can be used not only in funding residential properties types but also commercial properties. With bank financing, loan officers can limit the loan approval to certain properties only. 

Overlooks weak credit reputation

Loan officers from banks uphold credit reputation with high standards; thus, real estate flippers with a single history of denied loan can be affected by this condition. With the flip loan program, hopping into another real estate investment funding company can be easier despite an imperfect credit history. 

What are the requirements for a fix and flip loan?

The requirements for a fix and flip loan include the following:

Decent credit score

According to Amy Fontinelle of Investopedia, although it is beneficial if you reach the minimum requirement of 500, most private money lenders are not particular with this aspect as long as you can properly justify your weak credit score and have no history of bankruptcy or foreclosure. For the case of national lenders, a credit score of 620 + FICO score would be ideal.  This is a huge contrast to a bank who will not even look at you if you are under 700 often times.

Solid business plan

A solid business plan includes a document that shows the details of the work process and its cost. Lenders would also look into the prospect property and the list of contractors that you plan to potentially work with. 

Credible real estate experience

Different lenders have different experience level requirements, but having bought and sold a certain amount of properties in the last 3 or 5 years, can qualify you– you do not necessarily need fix and flip experience, though it is helpful. You should at least have real estate investing experience, and if you do not, then you will need to show at least extensive rehab experience (For example, a contractor can get a fix and flip loan with minimal real estate experience because he/she has strong experience on the most important part of fixing and flipping, which is the rehab part of it). If you are not a contractor and not an experienced investor, you can partner with a contractor, to make up for it. Anytime you lack experience in something, if you can bring a partner on with that experience, you can get your loan most of the time.  At least one flip experience within two years often is good enough too. The more inexperienced you are, the higher your loan rates will likely be. 

Sufficient cash reserves

Having sufficient cash reserves is primarily a personal requirement. This will come handy when the property takes time to sell or the cost of expenses goes overboard. Funded loans are usually fixed and lenders do not add additional amount to cater to future problems.  Also, if you don’t have the reserves, as stated above, a partner brought in with strong reserves can solve the reserve problem for you.

What are the typical interest rates for fix and flip loans?

The typical interest rates for fix and flip loans ranges from 8% to 12% with fees between 5 and 6 points. These rates vary in terms of the following structures:

Loan-to-value ratio (LTV)

The LTV has a loan amount that is based on the value of the property purchased. 

Loan-to-cost ratio (LTC)

The LTC has a loan amount that is based on the total cost of the property, including the renovation cost and other fees.

After repair value (ARV)

The ARV has a loan amount that is based on the estimate selling value of the property after all the construction.

What are the common terms of a fix and flip loan?

The common terms of a fix and flip loan range from 6 to 12 months, with possible extensions available in case the property takes time to sell. 

According to Randa Kriss of Nerd Wallet, experienced flippers can receive up to$ 2.5 million individual loans or up to $10 million credit line, depending on their qualifications. 

How much down payment is required for a fix and flip loan?

The down payment required for a fix and flip loan ranges from 10% to 20% in cash, and by then, the remaining amount will covered by the lender. 

In some cases, a down payment may not be necessary. For instance, when you own the property that you want to upscale, there is no need for a down payment. 

In another case, properties you own that have enough equity may serve as a collateral down payment instead of the cash option.  

What is the application process for a fix and flip loan?

The application process for a fix and flip loan can be summed up through the following steps:

1. Establish a business entity.

Do this by setting up a Limited Liability Company (LLC). This includes establishing the details about your business and then registering it by following state policies. According to Kiah Treece of  Forbes, this step will allow you to protect yourself and your assets as you dive into flipping homes. 

2. Prepare property and personal documents.

This will be marked as the business plan. This includes personal and financial details of yourself, a signed purchase contract, and a detailed budget plan classified into specific items. 

3. Present the appraisal of the property to the lender. 

The appraisal process highlights the worth of the property from scratch and how much it will cost at the end. This will serve as the basis of the lender in determining the loan amount that will be provided afterwards. 

4. Close the loan. 

Once the previous steps are reviewed and considered qualified for the financing, secure the requirements that the lender will ask to close the loan. 

How do fix and flip loans differ from traditional mortgages?

Fix and flip loans differ from traditional mortgages in terms of the length of the loan as well as the interest rate. While it takes 15 to 30 years for traditional home mortgages to amortize, fix and flip loans can last up to 24 months only with higher interest rates. 

Additionally, when the flip property sells before the loan term, the loan amount can be paid off without any penalty fees. Conversely, fix and flip loan financing also offers a maximum of 6-month long loan extension to qualified real estate flippers. These conditions strictly do not apply to traditional mortgages. 

In short, fix and flip loans provide flexible lending processes while traditional mortgages are fixed into their financing policies. 

 To talk to a real estate agent that knows creative financing contact Big Town Real Estate today.

Sources
LendingOne (n.d.). LendingOne – Best Fix And Flip Loans Near Los Angeles Available at:Fix and Flip Loans Los Angeles, CA | Hard Money Loans (lendingone.com) North Coast Financial Inc. (n.d.). Fix and Flip Loans California Hard Money Rehab Loans Available at: Fix and Flip Loans California | Hard Money Rehab Loans | Financing a House Flip – North Coast Financial, Inc. (northcoastfinancialinc.com) ID Mortgage Broker (n.d.). Fix and Flip Loans in California LA Mortgage Lender Available at: Fix and Flip Loans in California | LA Mortgage Lender (idmortgagebroker.com)
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