Who will fund your flipper?
Last week we discussed how to negotiate the best price on a fix and flip so that all your efforts are lucrative. You may have to kiss a lot of toads with our buying strategy before you find a taker but in the end, you'll be glad you got your equity up front.
When you are shopping for that poor little house that is screaming, "Make me pretty again!" you'll need to know ahead of time how you will finance it since the financing hinges on the condition of the home.
Ideally, you'll want a home that no one else wants to take on.
Not only will you have little competition but you will have the best chance of getting a great price if the home is in bad repair. The downside of a home that needs a roof, a kitchen and a new septic is that no traditional lender will touch it and you'll need to have the cash....yours or someone else's.
If you don't have cash to purchase a home outright, the next option is a hard money loan. Hard money lenders are private lenders who are willing to take a risk on you as a flipper for a pretty high premium. Depending on what state you live in, it can run up to 18%. Sound steep? It is. But keep in mind that the loan is short term and usually only requires interest payments until the balloon is due.
If you are looking more for a cosmetic fixer, then a traditional loan would probably work for you.
You'll typically need 20% down and the ability to show that you can afford the payments. The interest rates will be low and you won't be under the gun to sell the house like you would with a hard money loan.
I recommend trying a mortgage broker over a bank for this transaction since they tend to be able to soften the guidelines and can be more creative in finding a loan that fits your needs.
Cosmetic fixers are easier to do and generally don't require a contractor. The downside is that the seller is usually not so motivated to give a big discount and you might have more stiff competition. In this market the margin on a cosmetic fixer is going to be small but that's not to say that there isn't money to be made.
A little aside: Purchasing a cosmetic fixer is an excellent way to get into a home of your dreams at a fraction of the price. If you're willing to put in a little work, you can have exactly what you want and have instant equity to boot.
Whatever you choose as your project and however you choose to fund it, do your homework and have a good honest talk with yourself to make sure you are being realistic about what can be done in your budget.
Always, always, always have a good entrance strategy:
- what kind of house?
- how will I fund it?
- what needs to be done by whom?
- at what cost?
And a well thought out exit strategy:
- how will I sell it?
- who is my buyer?
- what is a reasonable price and time?
- what if it doesn't sell?
And as usual, contact your favorite real estate professional for guidance. She is a wealth of knowledge.
Next time, let's talk about a good fixer vs a money pit.