What You Need to Know About Fix and Flip Loans to Serve Your Clients Better

Fix and flip investments can be incredibly lucrative projects, providing investors with a solid return in a very short time period. Securing financing for these deals can be somewhat of a challenge, however. Conventional mortgage loans don’t make much sense for these projects, since they have 15 or 30-year terms and don’t provide any additional funds to cover renovations. Luckily, there are a few options investors can utilize to finance their home flips. Brokers and wholesale lenders also play a vital role here, educating and providing their clients with loan options designed specifically for flipping.

Continue reading as we break down the options investors have for funding home flips, and how brokers and lenders can serve their clients better by providing these programs.

Understanding Fix and Flip Loans

Borrowers seeking financing for fix and flip projects should stay away from conventional mortgages and instead opt for a loan that is more suitable for home flipping. These types of loans are typically shorter in duration, ranging from 6 to 24 months to fit the timeline of the flip. When applying for financing, loan qualification is more focused on the property and its return potential than the borrowers’ creditworthiness, which can be a major advantage for borrowers with less than stellar credit. These loans also prioritize speed, and this is important since investors will be looking to renovate and offload the property as quickly as possible. However, it should be noted that due to their flexibility and short-term nature, these loans often come with higher interest rates than their standard mortgage counterparts.

Key Fix and Flip Loan Options Brokers Can Provide

There are several different options brokers can provide to clients looking for financing for a fix and flip project:

• Hard Money Loans: Which are backed by owned property, such as the home itself, as collateral. Loans are based on property value and offer faster approval and more flexible terms.

• Bridge Loans: Short-term financing solutions designed for quick acquisitions. While they are typically used to “bridge” gaps in financing, they can also cover the cost of acquiring and renovating a property before reselling it.

• Private Lenders: Individuals or investment groups operating in the real estate space also often provide financing for projects like home flips. The benefit of working with a private lender is access to more flexible loan terms and customized repayment schedules to fit the needs of a project.

• Alternative Options: Be sure to explore alternative funding sources with your clients such as crowdfunding, seller financing, or partnerships.

Loan Terms and Costs: What Brokers Should Explain to Their Clients

Helping investors fully understand loan costs is crucial for setting realistic profit expectations and positions you as a valuable resource and partner to clients. First, you should make it known that the shorter duration of fix and flip loans often results in higher interest rates than conventional mortgages. Additionally, you should discuss the loan’s numbers, including LTV and ARV calculations. Every lender will have different processes for draws and how rehab funds are disbursed, which you will also need to walk your client through. Finally, be sure to cover any additional expenses, like points and fees, so they have a full understanding of the loan’s total costs.

The Loan Approval Process: How Brokers Can Help Investors Secure Funding

Brokers play a key role in streamlining the loan approval process for fix and flip investors. You can help your clients prepare the essential documents needed for approval, including renovation plans, proof of income/assets, and a written exit strategy. You can help your clients build a strong narrative to present to lenders, highlighting the ARV potential of the property, any comparable properties to confirm it, and the borrower’s experience in real estate. Be sure that borrowers have an accurate estimate of renovation costs, as this can affect the loan amount. You should also recommend that your clients get a professional home inspection done, as this can uncover hidden or costly issues that may affect the renovation process.

Avoiding Common Mistakes with Fix and Flip Deals

There are some common mistakes brokers can help guide their clients through in order to maximize their deal’s value. The first of which is ensuring they get an accurate estimate of the scope and cost of renovations. Be sure they get a professional home appraisal before they purchase a property, as this will tell them exactly how much work a renovation project will require (or if the property is better off avoided). Failing to plan for unexpected costs or delays is another common issue, which can be easily avoided by building a contingency fund to cover these expenses. Finally, a market shift may affect your client’s exit strategy, requiring them to go to a backup plan such as renting the property out to recoup project costs. As a lending partner, you can assist your client in securing the right financing to navigate these challenges.

How To Add Value for Clients Beyond Loan Assistance

Lending partners who go above and beyond matching their clients with financing build lasting relationships that often lead to repeat business and referrals. Helping your clients with crucial steps like due diligence and market research ensures they make smart decisions that maximize their ROI. You can also connect them with industry professionals like real estate agents, contractors, and tax professionals to assist them with all aspects of their deals. Offering ongoing support and communicating regularly with clients is another great way to stay top of mind, increasing the chance they return to you for future projects. For example, you can build an email list and send out property deals you come across on a weekly or monthly basis.

RCN Capital

The easiest way to save on an investment is to obtain financing from a real estate lender that can provide you with the best leverages and rates. RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. If you are looking to finance a real estate project, RCN Capital has competitive loan options and an award-winning broker referral program available to partners.