Traditional lenders will not work with you. Instead, to start to fix & flip houses, you need to find a hard money lender willing to lend to inexperienced investors. Do Hard Money will provide these loans. And, we have a team of specialists who will help you through the entire fix & flip process.
In the following article, I’ll cover some more considerations about starting the fix & flip process. Specifically, I’ll discuss:
- The Importance of Fix & Flip Financing
- Why Traditional Lenders Won’t Help
- Hard Money Lender Overview
- Hard Money Loans with No Fix & Flip Experience Requirement
- My Fix & Flip Background
- How We Help New Investors Start to Fix & Flip a House
- Final Thoughts
The Importance of Fix & Flip Financing
New investors shouldn’t ask how to start to fix & flip houses. Instead, they need to ask how to finance a fix & flip. Most new investors don’t have a ton of seed capital for all-cash deals. Accordingly, starting out as a fix & flip investor requires access to reliable financing.
Broadly speaking, new investors can purchase properties to rehab one of two ways: cash or financing. With cash, investors do not seek loans for the purchase and rehab costs for a deal. While this eliminates interest expense, it also reduces the return-amplifying effects of leverage. This brings up the second option: financing.
Most fix & flip investors take out loans for two reasons. One, debt can significantly amplify returns on the equity you do contribute to a deal. Two, for new investors, loans typically provide the only means to pay for a deal. With this reality in mind, I’ll use the rest of the article outlining how new investors can access reliable financing to start to fix & flip houses.
Why Traditional Lenders Won’t Help
Unfortunately, traditional lenders (e.g. banks, credit unions, and mortgage companies) will not provide new investors loans for a fix & flip deal, for several reasons.
Lenders will not issue traditional mortgages for distressed properties. These are exactly the sort of properties fix & flip investors want to purchase. This prohibition comes down to how a traditional mortgage works. With this sort of loan, the lender provides you a lump sum to purchase a home. The home then serves as collateral for the loan. That is, if the lender defaults (stops making loan payments), the lender can foreclose on the house, sell it, and recoup most of the loan balance.
If a property is in need of major renovations, it likely will not have a value to cover the loan balance. Simply put, traditional lenders don’t want to assume the risk of relying on a fix & flip investor to finish a rehab in order for a home to have the value to pay off a loan balance.
However, you can look into commercial acquisition/construction loans for distressed properties, but new investors still face the following two obstacles to this path.
Lack of Down Payment
With a traditional mortgage for a ready-to-occupy investment property, lenders generally require a down payment of 20% to 30%, depending on the unique situation. Most new investors just don’t have this sort of cash—which is why they’re beginning their investing journeys in the first place!
If new investors want to finance a property in need of significant rehab, they may be able to access a commercial acquisition/construction loan. However, this will depend on A) the property type (single-family homes generally don’t qualify), and B) the buyer’s general financial situation. And, this sort of loan will still require a down payment. Construction projects are fairly high-risk for lenders, as the property isn’t yet completed. Depending on the deal, lenders typically require 10% to 30% of the entire project budget as a down payment. Once again, this is a cost-prohibitive amount for new investors.
Lack of Experience
In addition to cash, most lenders who will provide fix & flip loans require experience. Basically, the lender wants to ensure that the investor has done this before, lowering the overall risk of lending. But if lenders require experience, how does a new investor get a loan to gain that experience? To do so, you’ll need to work with a hard money lender.
Hard Money Lender Overview
A common misconception exists with hard money lenders. That is, most new investors think that getting a loan from one is a hard process. Hard money lenders are so named because they lend primarily on the hard asset—the property.
With a traditional mortgage, lenders assess the borrower’s “soft assets” like income, credit score, and debt-to-income ratio. Hard money lenders, on the other hand, provide loans based on a property’s appraised ARV, or after-rehab value. They hire a professional appraiser to assess your budget, market comps, and contractor bids to accurately estimate what the property will be worth after the completed rehab. And most will lend up to 70% LTV based on this future value. This means that, if your purchase and total rehab costs are less than 70% of ARV, you can potentially get 100% financing on a deal.
To provide this outstanding financing option, hard money lenders structure their deals to provide protection throughout the rehab process. They don’t provide you a single lump sum (like a traditional mortgage). Instead, they release funds based on borrower draw requests. Once the borrower hits certain rehab milestones, the lender releases another tranche of funds. That way, the hard money lender avoids getting into the deal for more than they could recoup in the event of foreclosure.
Bottom line, hard money lenders are the source of financing for fix & flip investors—new and experienced.
Hard Money Loans with No Fix & Flip Experience Requirement
Okay, so all I need to do to finance my first fix & flip deal is find a hard money lender?
Not so fast. In reality, not all hard money lenders will issue loans to borrowers without fix & flip experience. Many of these lenders actually have very clear experience qualification requirements. This may be one deal under your belt or multiple deals worth of experience. As such, you’ll need to do a little research. Look up a list of hard money lenders, and just give them a call. Ask if they require investing experience for fix & flip hard money loans.
Realistically, most hard money lenders will have some experience requirements. Fortunately, Do Hard Money does not. We understand the challenges new investors face, and we want to help. We’ll absolutely work with people pursuing their first fix & flip deals. And, this policy is largely a result of my personal experiences and frustrations trying to find a hard money loan as a new investor.
My Fix & Flip Background
When I began my career, I understood that real estate offered tremendous wealth-building opportunities, but I didn’t know where to begin. Not sure what else to do, I became a licensed real estate agent.
Early in my career, I helped multiple clients buy distressed properties to fix & flip. I saw the awesome profits these investors made on fix & flip deals. But, I didn’t initially have the confidence to do any deals on my own. Instead, I helped investors find, buy, and sell properties. That way, I learned what investors looked for in good deals, and I caught the front- and back-end sales commissions.
Eventually, I decided to jump into my first deal. I found a great property, and I put it under contract. Unfortunately, this is where things nearly went off the rails. Despite having a great deal under contract, I couldn’t find a lender willing to provide me a hard money loan. I didn’t have any personal deal experience, so no one wanted to take a risk on me.
I finally did find a hard money lender who was willing to go out on a limb for me. Without a doubt, this person set me on the path to the real estate success I’ve had to date. Without his trust and willingness to help a new investor, I wouldn’t have been able to get that first deal off the ground. Now, I’ve done hundreds of fix & flip deals—both personally and helping others.
We’ve built our business around my personal experience getting this first loan. Now, the Do Hard Money team offers fix & flip hard money loans to new investors. Experience or not, we want to provide new investors the same opportunity I received when I first began.
How We Help New Investors Start to Fix & Flip a House
We do more than simply issue loans. We understand that most new investors need some help and guidance during their first deal. We provide this support. Our team will link you up with project managers and advisors to assist you through the entire fix & flip process. For us, we see this as a win-win:
- Win 1: We help new investors by giving them access to hard money loans for which they likely wouldn’t otherwise qualify.
- Win 2: By helping new investors, we help ourselves. We want you to succeed, as this lowers our risk as lenders. And, helping you along the way sets you up for success in that first deal.
With this philosophy in mind, we’ll guide and mentor new investors through the major steps of the fix & flip process.
Finding a Deal
I love to watch HGTV fix & flip shows—they’re entertaining. But, they also do a tremendous disservice to new investors. These shows make it seem as if outstanding deals just fall into your lap as a house flipper. Nothing could be further from the truth.
As a house flipper, you’ll spend the bulk of your time trying to find quality deals with numbers that work for your investment goals. We understand this, and we help investors search and vet deals that’ll work for their situations. Of note, we offer an incredible resource for finding deals: Investor’s Edge. This software allows investors to search through over 160 million properties. Using your desired filters, you can narrow these properties down to the potential deals.
And with a refined list of potential deals, you can market directly. The software lets investors print and mail postcards with pre-filled addresses. Or, if you prefer, you can send voicemail messages directly to property owners. This gives you the tools to bridge the gap between a great deal in theory and one in reality.
Finding Contractors and Confirming a Fix & Flip Budget
While we can certainly help you narrow down potential deals, investors eventually need to run accurate numbers. They need to A) find contractors, and B) confirm a fix & flip budget for a potential deal. Without contractor bids, everything is just back-of-the-napkin math. And while that’s good for narrowing down lists, successful investors need to build and stick to accurate fix & flip budgets. Following an accurate and realistic budget is the key to executing profitable deals.
For new investors, vetting contractors and building a budget can be extremely overwhelming. We understand this (remember, we were new investors once, too!). Our advisors can help you find and vet reliable contractors in your area. And, we can guide you through the process of working with a contractor to confirm a rehab budget. This doesn’t need to be an overwhelming task. With the right amount of support and guidance, new investors work with contractors to solidify an accurate budget for the deal.
Closing on the Property
Once we help you confirm your fix & flip budget, we’ll move onto actually closing on the property. As stated above, hard money lenders don’t release loan funds in a single lump sum. Instead, they issue fund draws based on key milestones. Purchasing the home will be the first such milestone, and we’ll work with you to release these funds and close on the property.
Related to this, new investors may not be familiar with the legal aspects of a home closing. We can help. We’ve been doing this for years, and we intimately understand the legal and regulatory requirements of closing on a home purchase. We will use this experience to support you during the process—and make sure you’ve covered all your bases.
Conducting the Rehab
After closing on the property, our project managers will help you through the entire rehab process. Broadly speaking, this involves two tasks. First, investors need to supervise the contractor team, making sure key deadlines are met. And, second, related to this supervision, fix & flip investors need to monitor and enforce the rehab budget. For example, if your budget calls for $10,000 in all new appliances, buying a single refrigerator for $10,000 would blow your entire budget.
This may seem like an extreme example, but a small miscommunication with a contractor could lead to this sort of situation. By closely monitoring and enforcing your budget, you can avoid these inevitable communication issues. This requires attention to detail and organization, and we can set you up for success. We’ll help you implement the processes that we’ve used flipping houses for years, ensuring that you have an effective and efficient rehab period.
Marketing and Selling the Rehabbed Property
Lastly, investors need to sell their rehabbed properties. This is how you profit on a deal. In basic terms, the excess of the sales price over the purchase, rehab, and holding costs equals your profit. During the rehab process, you try to keep costs down. During the sale, you try to maximize the selling price. By doing these two things, you get the most profit possible from a deal.
However, pricing a property for sale has its own dangers. Price too high, and it sits on the market forever, increasing your holding costs. Price too low, and you may drastically cut into your profit. Unless you’re personally a real estate agent, we recommend working with an agent for the sale. Yes, the agent commission will cut into your profit, but we would’ve already helped you factor this into your budget. And, real estate agents can bring tremendous experience in understanding the local market—and pricing your rehabbed property accordingly.
Our team will help you connect with reliable real estate agents in your area. We’ll explain to you all the steps of this process, making you feel comfortable with the entire process, and maximizing your profit, to boot!
To start to fix & flip a house, new investors need to understand the importance of financing. Without a loan, the quality of the deal itself won’t matter, as you likely won’t have the cash to make it happen. As such, new investors need to find hard money lenders that specialize in new investor deals.
This is what the Do Hard Money team does! We understand that new real estate investors need to start somewhere. And, to help you get started, we provide hard money loans without an experience requirement. But, we go further than that. Our team helps new fix & flip investors through the entire process—not just financing. We provide the support, mentorship, and loans to help you get your start as a successful fix & flip investor.