Real estate investors use fix and flip loans, also known as bridge loans, rehab loans or residential transition loans, to purchase a property, improve it, and sell it for a profit. There are two components to fix and flip loans: the purchase and the funds for the rehab.
The purchase is relatively straightforward. The lender typically will size their total loan amount to both the after-repair value, or Loan-to-Value (LTV), and the total cost of the project, or Loan-to-Cost (LTC). Rates and fees vary greatly by geography, and terms typically range from 9 to 24 months. The process is similar to other types of mortgage finance. You complete an application, provide documentation, and order an appraisal. You also are required to provide a business plan for the property including a detailed renovation project with a timeline and associated expenses by project phase. Once your loan is approved, you close on the purchase, typically with you funding the down payment and the lender funding the remainder of the purchase price.
The rehab process is where fix and flip loans get interesting. You now own the property and want to begin to improve it. You need funds to buy materials and pay contractors. Most fix and flip loans require you to front this initial investment in materials and labor. Once you’ve completed a phase of the work consistent with your renovation project, you request from the lender something called a “construction draw.” This means that AFTER the investor has made renovations, they can submit a request for reimbursement. Once the request is received, a fix and flip lender will send an inspector to the property to approve the work, which will often take up to 72 hours. The investor then has to wait for the lender to receive the inspection report and release the funds. If you want your project to keep moving along in the interim, you have to have enough cash to fund additional materials and construction services. This may not sound like much in theory, but managing construction draws while juggling contractors and supply deliveries can be overwhelming.
There is another way. Well established flippers often use financing to purchase the property and their own cash to fund the improvements. The other way is to use a fix and flip loan to purchase the property but fund the improvements with another source of financing, such as LightStream to finance the renovations. We’ve teamed up with LightStream, the nation’s premier online consumer lender, to offer low, fixed rates for virtually any home improvement project without requiring home equity or an appraisal.
Learn more about LightStream’s easy, affordable process and tackle your home improvement project. For more investor tools and resources, visit our Resources Page.
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