Rehab/Flip Loans
Loan Fee: 3.00-3.75%
Processing Fee: $965.00
Interest Rates: Very Competitive
Loan to Value: Not Greater Than 65% (based off of finished appraised project value. The builder must have some of his own funds/equity in the project.)
Overview:
Rehab loans to flip properties are very popular at the moment. They can also be difficult to obtain, because of the risk that investors feel there is in properly completing the project. Most successful “Rehabbers” either use their own funds, or have a money partner
There are many builders and “rehabbers” who are taking advantage of the rash of foreclosure and bank owned properties. They are purchasing them, “Rehabbing” them, and putting the property back on the market for a quick turn and profit. There is nothing wrong with this. Certain properties that are foreclosed on are in poor shape. Getting these back to “market” condition is doing the community a service, and if someone can make a profit in doing so, then GO USA!
It takes money to rehab properties. They must be purchased, materials obtained, labor paid for and often times permits are required. The properties are valued based on finished value. An appraisal is performed, using the existing property, along with plans and specifications for the improvements. Because there is a spread between hard cost and finished value, some borrowers feel they should be able to borrower the entire amount needed as the investor will be protected with the spread of value mentioned above.
In times past, it often happened that way. Today, however, most investors are going to want to see the borrowers with “skin in the game”. The investors want to know that if the project does not work out as planned, their loan is still protected because the borrowers need to expect to put 40% or so of the hard cost into the project in cash or other collateral.
There are special considerations that arise with Rehab/Flip Loans, as with all types of construction loans. DO NOT expect the investor is going to hand you a check and trust that the monies will be spent as planned. Project management is a big issue. Some title companies used to have construction escrow services. These services would escrow the funds, inspect the invoices presented and inspect the project to insure that the work was actually completed as stated.
At the present time construction escrow companies are hard to find. The risk was simply too great for them, and the business was not profitable. Most investors do not want to take the time to manage the projects themselves, so this becomes a big hurdle!
All this being said, expect to pay a higher interest rate on rehab loans. Unless you get a loan from a family member, the interest rate will probably be just breaking the double digits. The client MUST make sure you add the cost of interest and loan fees to your project, with a reasonable holding time, and then calculate your profit. Those costs sometimes will simply make the project NOT pencil.
If a client still wants to try this be prepared to present the following information at minimum.
- 2 years tax returns for both personal and business (if applicable).
- W-2’s and current pay stubs (if applicable).
- A current financial statement, both personal and business.
- A YTD profit and loss statement.
- A YTD income statement.
- Credit Report.
- Business and personal bank statements.
- Earnest money agreement.
- Building plans (if applicable)
- Cost Breakdown
- Building Materials Specification Details.
A lender is also going to want to see a preliminary title report and a history of the property taxes, zoning and permits. You will also need to pay for an appraisal, showing the finished value of your project.
If after all of this the client still wants to consider a rehab/flip loan, and they have the cash and experience to pull it off, then we will try our hardest to help them!