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Maryland Fix and Flip Loans
What Are Fix And Flip Loans?
Fix and flip loans are a type of financial backing that make it possible for a developer to purchase, renovate, and re-sell a property for profit. These types of loans can come from a number of sources, from banks and other financial institutions to private lenders. Before even considering a fix and flip loan, however, the first order of business will be to find a property to invest in. Once you have located and chosen a property to renovate, then it will be time to consider financing options.
If you already have the financial means to cover all the necessary costs, you can proceed to the next steps. However, most individuals will need to seek out options to finance the four steps to flipping a house. These include:
- Depending on the lender you choose to work with, you will require 20%-45% of the full price of the house as a down payment.
- Covering the costs of labor and materials for renovating the house.
- Closing costs for a Realtor who will be responsible for locating a buyer and selling the house once renovations are completed.
- The total “holding” costs of the home, including any Homeowner’s Association fees, insurance payments, and various costs of owning the property during the renovation process.
FINANCING YOUR PROJECT
When it comes to financing a fix and flip project, traditional bank loans are not a promising option. This type of endeavor is considered risky, therefore many banks aren’t interested in funding such a project via a loan. House flippers are basically real estate investors. This means that income does not come on a regular basis because the work is essentially seasonal in nature. This is one of the main reasons a bank will not approve a business loan for this type of venture. For banks that are willing to provide this kind of loan, you may discover that their loan product does not meet your needs. For example, bank loans are usually long-term and most fix and flip projects take only a few months from beginning to end.
Most people undertaking a house-flipping project choose to find alternative ways to fund it. Oftentimes – especially for those undertaking their first endeavor of this kind – friends and family may be willing to invest or loan the necessary funds. Others will choose to access the available home equity funds. Over time, successful fix and flip projects create a track record that showcases success. Once this occurs, bank credit and funding from private investors become more readily available options.
MAKING ALL THE RIGHT MOVES
There are some important steps you will need to take prior to applying for a bank loan to fund your project. Of course, the best teacher is experience, so once you have some successful projects in your portfolio, more doors will open and progressively better opportunities will come your way. Until that time, there are some points to take note of that can assist you in securing funding by providing potential lenders with the added assurance that you are a responsible and sensible borrower. These points include:
1. Have A Sound Business Plan In Hand
Informing a potential lender of the specific details regarding a fix and flip property will be up to you. These types of lenders are used to lending money for the improvement of properties which are in poor condition. They will want to know precisely how much rehabilitation will be necessary in order to make an informed financial decision. To present your proposal in its best light and increase your chances of receiving monetary backing, you will need to provide:
- Background information on all parties who will be involved in the project such as inspectors, contractors, partners, etc.
- The physical address of the property.
- At least one “Plan B” in the event that the initial renovation plan does not work out for any reason.
- A detailed analysis of the neighborhood in which the property is located.
- Comps, or sale prices, of at least 2 to 3 similar homes in the same neighborhood (“comps” referring to comparable properties).
- Sound financial forecasts, various strategies, and a detailed and realistic timeline for the renovations. This is referred to by house flippers as “scope of work”.
- Two valuations of the property as provided by a professional appraiser, including current property value and estimated value when all renovations are completed.
2. Provide An Accurate Estimation Of All Renovation Costs
An initial estimate that falls short of the actual funding necessary to complete the project can cause the entire fix and flip project to fail. In order to avoid this issue, it will be important to create a very detailed scope of work. This will require the assistance of a professional appraiser and an experienced contractor. Working together, an appraiser and a contractor will be able to determine and provide all-inclusive, accurate numbers for the lender.
3. Develop A Comprehensive Network
From the first steps of your fix and flip project to the last, making good connections will be of the utmost importance. When choosing the people who will be a part of your endeavor, do your homework and make certain you are aligning yourself and your project with hard-working, reputable people. It will truly be a group effort, and the more experienced the members of your group are, the more successful and lucrative the outcome of your project will be.