Minnesota Fix and Flip Loans
When considering embarking on a fix and flip property project, funding will be the first priority to consider. When you have found a house you are interested in renovating and reselling, then it will be time to look at financing options for the undertaking. Some individuals are fortunate enough to have money on hand to enter a business venture like this without worry, which is an excellent position to be in. However, if you are not in such a position, then you can look into a number of possibilities for obtaining the backing you will need. There are four steps you will need to take into consideration when planning out the finances that will be needed for fixing and flipping a house:
1. Money to cover the full costs of the materials and labor needed to renovate the property and get it ready for re-sell.
2. Holding costs, which will include fees due to the local Homeowner’s Association, insurance costs, and any and all costs related to ownership of the property throughout the renovation process and until it is sold.
3. A total of 20%-45% of the total price of the property as a down payment to the lender(s).
4. Fees for the Realtor who will handle the sale of the property once the renovations are complete as well as closing costs.
When undertaking this type of project, most traditional bank loans are not readily available. This is because fix and flip projects are considered to be high-risk ventures which could result in a loss for the borrower and repayment issues for the bank. Those who are involved with this type of business venture are generally considered to essentially be real estate investors. This is due to the fact that when it comes to work such as this, there is no steady income because the work is considered to be seasonal in nature. This is the reason banks are so hesitant to approve loans for such projects. When a bank is willing to provide a loan for a fix and flip project, the loan product is usually insufficient to meet the full needs of the job. Since most projects of this type generally take only a few months to complete, banks are not interested in providing financing as loans are long-term.
Due to the obstacles presented when trying to obtain funding via financial institutions, most individuals involved in renovation and re-sell projects look for alternative ways to garner funding for their work. Early on, those new to the house-flipping business may find it easiest to obtain loans or investments from friends and/or family members. Accessing any home equity that may be available is another good option. Once you have completed some successful fix and flip projects, your track record and skills will speak for themselves and financing options will become more readily available. Lines of bank credit will be easier to obtain as well as loans which will cover all necessary costs.
Once you are prepared to apply for a bank loan to fund your fix and flip project you will want to take some steps to improve your chances for approval. The ideal time to look into bank loans or lines of credit is after you have completed a number of successful fix and flip projects. Anyone, whether it be a financial institution or a private lender, will be more willing to finance a business project for someone who has been successful in their undertakings. Whether you have reached this stage or are still working toward it, there are some things you can do to improve your chances of receiving the financial backing you will need:
1. Prepare and Present A Solid Business Plan
Any potential lender will want to know as many details about your project as possible. Most potential lenders you will be directed to have experience in funding projects of this type, and they are aware of the amount of work it can take to completely rehabilitate the properties. They will want a detailed outline of just how much work will need to go into the property you will be working with so that they can make a sound decision regarding financing. Be prepared to provide the following:
- Property address/location
- Information on every person, company, etc, that will be working on the project or involved with it in any way (contractors, inspectors, other investors, etc)
- An alternative plan to turn to in the event your original plan meets with a problem.
- Two property valuations prepared by a professional appraiser to indicate current property value and the estimated value once the rehabilitation is completed.
- Sale prices (comps) of 2 or 3 like properties in the neighborhood to show similar values.
- A concise, detailed timeline indicating renovation aspects along with financial forecasts for the project at various stages, known professionally as scope of work.
2. Present A Clear Estimation Of Project Costs
The last thing you want to do is get deep into your project only to find that you have underestimated the amount of funding you will need to complete the work. This kind of error can doom the project. You will want to create a very thorough scope of work, with the help of both an experienced contractor and a professional appraiser. This will ensure an accurate accounting of everything needed to fully complete the project.
3. Build Your Network
For projects such as this, your professional connections will be invaluable. As you build your team, take the time to learn everything you can about each one, their experience, success rate, and work ethic. You want to work with reputable people who will be an asset to your current project as well as any future ones.
Taking the time to learn everything you can about each and every step of the fix and flip process will guarantee lucrative outcomes and many successful ventures. Knowing the ins and outs of your business is the main way to rise to the top of your field.