So, what exactly is house flipping?
House flipping is a term in real estate that refers to buying houses with the intention of selling them quickly.
However, you need to locate the ideal house for house flipping. In most cases, these are houses that may need a bit of fixing here and there and selling them for more than they were paid for. It’s become a real deal among real investors looking for quick money.
Thing is, investors in this kind of business are in most cases faced with financial challenges since the properties in question are sometimes competitively in demand. While the conventional lenders are catching up to the idea of house flipping, real estate investors are forced to turn to other options such as hard money loans.
Hard money loans are in many ways different from conventional loans, but the benefits are almost the same.
How It Works
Ideally, the idea of buying cheap and selling at a higher price may or may not require refurbishing. But considering that you want to sell the property quick, it’s important to upgrade the house.
This will help to increase the property value. If you’re interested in this business, there are costs to consider. They include:
- Purchasing property costs
- Closing costs
- Permits
- Construction contractor costs
- Supplies and equipment
- Marketing expenses
- If need be, broker fees
In the home-flipping business, time is of the essence. This is because the more the property stays in your hands, you’ll be incurring carrying costs, and for your information, these costs accumulate quickly. In addition to this, prices in real estate are cyclical.
So as soon as you’re done closing the deal, you need to move in and start with the renovations if any are needed. In a nutshell, there are tight deadlines to meet. Now, let’s get to our main topic of discussion.
Do house flippers need hard money lenders?
Financing a Fix And Flip Project
By now, you’ve seen a lot of TV shows where an individual buys a neglected house and transforms it into this ideal one of a kind house that sells immediately at a top dollar asking price. But there are so many things they don’t tell you on those shows.
As earlier mentioned, time is of the essence when you’re in the house flipping business. This means that even if you’re looking for financing, a long term loan is not the ideal type of loan you’re looking for.
Banks are somewhat hesitant when it comes to short term loans, most especially for financing house flipping, usually because they make money from interests and penalties attached to loaned money.
If you were to borrow a long term loan carrying a 15-year payment term to flip a house and pay it off within a year, chances are that the bank will not lend to you again. While on the same note, they’d consider it committing fraud if you applied for a loan for an owner-occupied property and used it for a fixer-upper and flip.
As you can see, your financial options are slim.
The Benefits of Hard Money Loans for House Flipping
Most aspiring real estate investors interested in house flipping business are unclear on ideal financial options ideal for house flipping. As it turns out, most if not all conventional lenders will decline house flipping loan applications. The best loan for house flips is a hard money loan.
Hard money lenders provide short term loans to borrowers who may not be creditworthy but have the collateral as security. Typically, flippers in real estate will use the subject property as collateral or any other owned property.
With minimal requirements, hard money lenders use a loan-to-value ratio in determining the loan terms. However, do not expect the interest rates to be the same as those of bank rates. Let’s now take a look at some of the benefits of hard money loans to house flipping borrowers.
1. Convenience
The regulations and application criteria used on conventional mortgage lending are not ideal for house flippers. This is because they are time-consuming, with the process taking nearly a month. This is longer than a house flipper would want to wait.
With a potentially profitable property on sight, it’s important to have your finances in order and fast. Hard money loans are easily accessible and are the most convenient for house flipping projects.
2. Collateral
While hard money loan terms can vary from one lender to another, basically, the requirements are the same wherever you go. When borrowing a hard money loan, the subject property will be used to serve as collateral.
Instead of the property you’re investing in being used as collateral, some lenders may allow you to use other assets as collateral. This is good, considering that they’ll not dig into your credit history, financial stability, or credit scores.
3. Flexibility
“Conventional banks have a strict process they have to follow. Hard money gives borrowers access to lenders that can get more creative and fund deals that make sense,” said Chris Hanson of Hanson Capital.
On the other hand, hard money lending allows you to negotiate the loan terms. This is because you’re directly dealing with the lender.
They’ll be with you all the way to see the completion of your project and in addition to this, they’ll provide you with valuable real estate and financial advice that will go a long way to sustain your other projects.
So, to answer your question, it’s an absolute yes!
House flippers do need hard money lenders in so many ways. As an investor who is considering flipping but you’re in a financial fix, a hard money loan will sort you out. It will help you close the deal before someone else does. It’s important to do your research on the best lenders in your area to get the best deals because, without the right funding, your flip and fix project can turn into a flop!
