Buying real estate, repairing it, and selling it quickly tends to be a profitable recipe. However, a key component of this recipe for success is access to capital. If you do not have sufficient funds but are interested in rehabilitating a property, a hard money lender that offers fixed and reversible loans could be an excellent financing option. These loans are structured in such a way that they allow the buyer to quickly acquire the property and have access to a reserve of funds for construction and renovation costs.
Buying real estate, repairing it, and selling it quickly tends to be a profitable recipe.
Advantages of Fix and Flip loans
There are many advantages to arranging and exchanging loans and the demand for this source of financing is constantly increasing in the real estate investment industry.
Four key benefits include:
- Quick approval – Getting approved for a fixed and reversible loan is a much faster process compared to the traditional banking system. If the borrower has submitted the requested documents, a private lender can approve the loan in a couple of days, while a traditional financial institution can take at least a month. In addition to the significantly longer wait time for bank loan approvals, the borrower will need to submit numerous documents and clarify multiple conditions as part of the process.
- Any Property – Properties in different states of condition can qualify for fixed and reversible loans. Whether the property is owned by a bank, a short sale, a foreclosure, or in a dilapidated condition, a borrower is likely to find a hefty money lender willing to finance the deal. Again, a borrower may not have the option of financing these types of real estate opportunities with a bank. Banks are very risk averse and have strict rules on what type of property they can accept as part of their loan portfolio.
- Zero Prepayment Penalties – If you obtain a loan from an established bank, you may be penalized if you have the opportunity to cancel the loan before the due date. This is called a prepayment penalty. Most fixed and reversible lenders will not subject you to this fee.
- Covered Repairs – When you buy a property with the intention of changing it, a significant portion of your budget will be spent on construction and renovation costs. A fixed lender will generally establish a loan reserve that will cover the costs of repairing the property in addition to interest. This can relieve a lot of stress and pressure for builders and developers as they don’t have to worry about spending money out of pocket on repairs or payments.
Teaming up with a strong lender who understands your property, the local real estate market, and is willing to help you through the acquisition, construction, and sale process is vital. When choosing a hard money lender, keep the following in mind:
- The lender must have sufficient experience in the industry. A private lender that has deep roots in the real estate investment market will not only be able to offer you a better deal, but will also have numerous contacts that will come in handy along the way, from recommended settlement companies to permit issuers and other preferred providers. . This can prove to be a great asset, as speed, quality, and efficiency is the name of the game in the fix-and-change world. The less time you need to spend vetting companies and contractors, the more money you have in your pocket.
- Check the history of the lenders to make sure they are genuine and have a good track record. Lenders who tempt borrowers with “interest rates” or a “no-document” underwriting process may be worth a closer look. As with most things in life, if it seems too good to be true, it usually is.
- Finally, you need to check what past or current customers have to say. Is the lender responsive and knowledgeable? How many loans do they have on the street? Do they have good ratings on Google or BBB? Just as the lender performs due diligence on its borrowers, borrowers must, in turn, perform due diligence on the hard money lender. It is a partnership and both parties must be strong and committed to the process to ensure success.
