As anyone who flips houses for a living knows, time is money. The sooner your business is able to flip that house, the sooner it is able to make its profits and move on to the next flip. Also, you want to be able to flip your house quickly while the market is hot. Waiting too long could mean taking a loss on the house. So how do you ensure a quick turn around? Here are a few helpful pointers when it comes to flipping a house.
Secure A Hard Money Loan
If you have never flipped a house before, you should know that securing a mortgage for a flip is a different process than securing a mortgage for your residence (whether it is a primary home or a secondary home). Most banks/lenders will not finance a house flip. Even if they did, you would likely find the terms to be disadvantageous. After all, do you really want to take out a 30-year mortgage for a house you intend to sell right away? If you are flipping a house and need cash quickly, your best bet is to secure a hard money loan. But what is this type of loan exactly? More on that below.
What Is A Hard Money Loan?
A hard money loan is a loan that is backed by collateral–often real estate. This is perfect for small companies that are in the business of flipping houses. If you own a physical office, you could use that as collateral for the loan. You could also use a residential property or land that you may own. Unlike most traditional mortgages, hard money loans can – and often are – used to finance “fix and flip” home purchases. As a bonus, these loans tend to have very quick turnaround times from application to approval.
Other Advantages Of Hard Money Loans
Hard money loans have several other advantages as well. For one, this type of loan typically has lower credit score requirements than other types of loans. This means that you are much more likely to secure approval for a hard money loan than a traditional mortgage loan. This is especially helpful if you are just starting out or if your credit score is less than stellar. Another advantage of using “hard money” to flip a house is that these loans give you increased purchasing power. Lenders will often finance most of the purchase price of the house to be flipped, meaning that you are not required to pay a large down payment. Also, because these loans are typically made to business entities (such as LLCs) instead of personal investors, you can protect your personal assets while making the purchase. Finally, these loans allow you and your house flipping business to pursue multiple investment opportunities.
What Can Hard Money Loans Be Used For?
The loan that you obtain can be used for several purposes, as long as they are related to the purchase and “flipping” of properties for your business. Here are some of the things that you can use a hard money loan for:
- To purchase the house
- To make repairs on the house
- To serve as a “bridge” loan for future investments
A hard money loan will often cover 100% of the repairs on a home. This is essential to those in the house flipping industry as the repairs determine the profits. So, for example, if you need to book the services of roofers near DFW, a loan can cover that cost. A loan can also help you pay for an overhead door that needs repaired or replaced at the time of purchase. When flipping a house, you need to make the necessary repairs as quickly as possible, which means you need to generate cash as quickly as possible. Roofers will not wait around for you to come up with the necessary funds for their services.
Hard money loans can also serve as bridge loans. This means that if you are trying to secure long-term financing, but need a smaller amount of cash in the meantime, a loan can get you through. Many small businesses use these loans for this exact purpose. Bridge loans are common within the house flipping industry, where large expenses pile up and profits can often be delayed. A hard money bridge loan can give your business the cash it needs to stay operational and continue growing.
Do You Need To Be An Experienced Company?
Fortunately, the answer here is “no.” Contrary to popular belief, you do not have to be an experienced house flipper to obtain a hard money loan. You can get a hard money loan even if you are flipping a house for the first time. This – combined with the low credit score requirement – makes these loans the go-to loans for first-time house flippers. While your rates may be more favorable if your house flipping business has been around a long time, this is certainly not a requirement with most hard money lenders.
As with any type of loan, you will need to have your documentation in order when applying for a hard money loan. There are several documents that you will need when applying for a loan to flip a house. For one – at the risk of stating the obvious – you will need your driver’s license or other government-issued I.D. You will also need bank statements for yourself or your company. You will likely also need to provide a sales contract for the property as well as a list of other properties that you (or your company) own. The lender may ask to see the documentation of other “fix and flip” projects that your company has completed. Tax returns will likely be required as well. Finally, you may need to show estimates for the repairs to be made on the property (such as estimates from roofers near DFW or for overhead door repairs).