7 Financing Tips For House Flippers

Hard Money can be a quick way to fund everything from residential property, to industrial facilities to new home building. I will not get into every aspect of hard money but I will give you a general frame work that your brain can understand.

First of all a majority of hard money banks will allow you to finance up to 65% of the value of the house. If the loan is for rehab purposes, the lender will use the “after-repaired value” of the home as a frame of reference. I have seen occasions that went as high as 75% but 65% is the norm.

These loans are very situational and very flexible so there is a lot of space if the deal makes sense. It could be a set back if you are new to the game but fortunately that can usually be offset with sufficient reserves and a good plan of action.

Let’s look at an investor rehab loan to visualize how the numbers work.

Let’s say you came across a out dated and run down old house in a good neighborhood where homes sell for $100,000. The seller takes you through the home and you determine that it needs around $12,000 in work. You have gotten pre-qualified for a rehab loan and know you are wondering what is the maximum you should pay for the property.

To keep it basic, you want to take $100k x 65% - loan costs - repair costs/holding costs = Purchase price. Loan costs, for hard money loans, may run from 8-13% of the total loan amount. They are not inexpensive but it’s less money than you will disburse to a partner! For now we can assume costs of 10% and holding costs of $2,000. Given those numbers, you probably should not pay more than $45,000 for the house. If you pay more, that just means more money out of your pocket to complete the project.

Here are a few quick tips you can utilize to maximize the likelihood of getting approved for hard money loans, in general:

1. The more equity in the investment property after the loan, the better, 2. The higher your credit score, even better 3. The more credit history you have, the better! 4. The more liquid assets you can prove that you have personally or have guaranteed access to (lines of credit, partners, rich uncles. . .) the better 5. The more populated the area, the better 6. The faster the properties in the area sell, the better 7. The more solid the appraisal value, the better! Most hard money lenders like to use fire sale values as the basis point of the loan so don’t be shocked. This is definitely not the time to use stretched values.

All in all, this is a numbers game. Don’t get attached to a home if the numbers don’t make sense. Hard money lenders can be flexible but bring them a deal where the numbers don’t add up and it could cost you a relationship. Credit doesn’t always matter but it does help, tremendously, if you can show good credit history.