Buy & Flip with Hard Money Loans

Rental Property Investor · Steamboat Springs, CO · Member since 2017 · 255 posts · 154 votes

7y

1) Yes. It sounds like you're talking to a banker, not a "hard money lender". They're going to be a lot more conservative and require larger down payments/reserves. Call another 20 hard money lenders in your area, someone will be willing to work with you if the deal is good enough. Most lenders will still want you to have some kind of money in the bank, but the terms vary widely. Don't take one "no" for an answer. The better the deal gets, the more likely you find someone that wants to underwrite it.

2) Take out a HELOC on your primary residence. Go to local REIA meetups and find a more experienced partner to work with on your first deal. Save up money for a year until you have enough to really get started safely. Not really recommended, but there are also plenty of examples of people using credit cards to fund their first reno. Usually a very bad idea, but I'm not going to pretend to know enough about your situation to tell you what to do.

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Christian Rodriguez

OP

Real Estate Broker · NY · Member since 2018 · 30 posts · 3 votes

7y

Originally posted by @Aaron H.:

1) Yes. It sounds like you're talking to a banker, not a "hard money lender". They're going to be a lot more conservative and require larger down payments/reserves. Call another 20 hard money lenders in your area, someone will be willing to work with you if the deal is good enough. Most lenders will still want you to have some kind of money in the bank, but the terms vary widely. Don't take one "no" for an answer. The better the deal gets, the more likely you find someone that wants to underwrite it.

2) Take out a HELOC on your primary residence. Go to local REIA meetups and find a more experienced partner to work with on your first deal. Save up money for a year until you have enough to really get started safely. Not really recommended, but there are also plenty of examples of people using credit cards to fund their first reno. Usually a very bad idea, but I'm not going to pretend to know enough about your situation to tell you what to do.

Thanks so much for your response! Unfortunately I do not have a home of my own but I will keep trying for other hard money lenders. I also will be attending a local REIA in hopes that someone will team up with me on something. Any other suggestions on funding a Reno?

1 Reply

Aaron H.

Rental Property Investor · Steamboat Springs, CO · Member since 2017 · 255 posts · 154 votes

7y

Look into a "203K loan", that can sometimes be a way to get into a property for low money down and be able to finance the rehab costs.

If you've got a 401K/IRA, it's sometimes possible to use that as a method to fund real estate deals; the details are complex.

You've already got a handle on a lot of the main methods - hard money, private money, friends and family, partners, crowd-funding online. Bottom line, you either have the money yourself or you need to find somebody who does that will lend it to you. Who that person (or institution) is or how much that costs you has an infinite number of variations.

Consider reading one of the BP books, e.g. "Finding and Funding Great Deals" for a more exhaustive look at the options.

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Caleb Jordan

Lender · Arlington, TX · Member since 2018 · 465 posts · 184 votes

7y

Originally posted by @Christian Rodriguez:

Hello everyone I am brand new to Real estate and have been searching for the answer to my question for a while now. I am currently interested in buying and flipping homes and I have been studying the topic and reading books but I still have some broad questions that hopefully maybe someone can answer. I’ve spoken to a gentleman at a financial mortgage bankers Corp. about a hard money loan for a buy and flip property. He told me what I have in the bank is not enough to cover hard money loan fees (such as interest and down payment) but I’ve read and listened to podcasts that stated I don’t need so much to start. I wanted to use a hard money loan to buy and renovate the property however he told me I need to fund the down payment, closing costs, and renovation on my own and then they reimburse the money for renovations once the renovations are complete. I unfortunately don’t have enough money to renovate a property so I thought that buying and flipping wasn’t not for me. However BiggerPockets has me thinking it is possible. Unfortunately I have tried to raise money from friends and family but of course as a beginner, no one believes in me yet. So my question is:

1) Is there such thing as hard money loans that can fund the deal and renovations at the beginning of the deal?

2) How else can I fund renovations if I can’t find a hard money loan that’ll fund the deal from the start?

Fees for Hard money vary based on lender, size of loan and how much they are funding. 90% funding on the purchase and rehab is easy enough to find if you have some experience, 100% will be rare.

You will have to pay closing costs (things like insurance, appraisal, title insurance) plus some lender fees, they will vary greatly between lenders and products. After closing costs and fees you could easily pay 5% to 10% of the loan amount.

You will probably need 6 month reserves that covers taxes monthly payment.

Hard money lenders usually require you to start rehab out of your own pocket. The money is released in increments, called draws, as the work is completed. If you have a 45k rehab you bring 5k, the lender brings the other 40k. You start the project with your money then they give you the 40k in chunks called "draws." A plan is set up before for your rehab as to when you get that money. Usually it is as you complete various items, then they give you another chunk of the money and you complete more of the rehab and then get another portion of the money and so on.

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Diana Muresan

Lender · Chicago, IL · Member since 2018 · 352 posts · 147 votes

7y

Lets clear the air. I am FHA 203K and FannieMae HomeStyle renovation loans certified and I close in all 50 states. What are your total funds? You can do your first flipper as an FHA 203K renovation loan, you will only need 3.5% downpayment and you can have your realtor talk to sellers agent and build all your closing costs as a seller concession. If you don't have the 3.5% downpayment yet, perhaps you can work it out with a family member so you can receive a gift which is allowed on owner occupied properties

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Bill Rich

Lender · Marlton, NJ · Member since 2016 · 126 posts · 44 votes

7y

Hi Christian

A few things you need to consider. In my opinion a 203k or HomeStyle loan could be an option but you need to be very careful. These loans are not really for flipping purposes but more a buy and hold. Lenders who originate these loans are generally required to keep them opened for a period of time ranging from 6 months to a year depending on who the investor is on the secondary side of the market (this isn't general consumer knowledge but lenders know this). A fix and flip mortgage is indeed a type of hard money loan that will require larger down payments when compared to the 203k or HomeStyle and sounds more like what you need. You also have to remember that you are signing an afadavit that says that you are going to live in the property with a 203k. So if you aren't planning to live in the property you really can't sign the afadavit. Personally I have closed hundreds of 203ks and HomeStyle renovation mortgages and would be happy to answer any questions you may have. I will have access to fix and flip programs as well and can guide you through the process.

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Christian Rodriguez

OP

Real Estate Broker · NY · Member since 2018 · 30 posts · 3 votes

7y

@Diana Muresan Thanks so much, I believed that if you use the 203k loan then it must be owner occupied for a year before selling? I wanted to fix and flip in a matter of months.

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Bill Rich

Lender · Marlton, NJ · Member since 2016 · 126 posts · 44 votes

7y

Christian

Yes FHA requires you to occupy the home for the first 12 months of ownership. However if you sell it then it would negate that affidavit you are signing. However if you aren't to occupy the home at all but you are saying that you are just to take advantage of owner occupant guidelines is a slippery slope that could be construed as mortgage fraud. FHA will do audits as well to insure that you are occupying the property as well.

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Diana Muresan

Lender · Chicago, IL · Member since 2018 · 352 posts · 147 votes

7y

None of the renovation loans require you to hold the loans, that’s absolutely not true, it is false!!! That’s not allowed on the conventional market. I refinance them myself after 6 months once repairs are done if they build 20% in equity so we can get rid of the Mortgage Ins, that’s in case you want to hold on it, otherwise you just sell it. Bankers loose their compensation if a buyer refinances after making less than 5 payments on the loan which is not the case on the flipper either since you need time to get permits, do the work and finally sell it.

FHA 203 k is for owner occupied, many buyers use the loan and Sell after repairs, obviously no one lives in the unit during the repairs and mortgage payments are actually rolled in the loan during the construction, so technically is owner occupied by is really an empty unit during construction and you are free to sell after.

It's just a matter of figuring out if you can do. FannieMae HomeStyle or a 203k FHA.

Let me know if I can assist you in any way

2 Reply

Christian Rodriguez

OP

Real Estate Broker · NY · Member since 2018 · 30 posts · 3 votes

7y

Originally posted by @Caleb Jordan:

Originally posted by @Christian Rodriguez:

Hello everyone I am brand new to Real estate and have been searching for the answer to my question for a while now. I am currently interested in buying and flipping homes and I have been studying the topic and reading books but I still have some broad questions that hopefully maybe someone can answer. I’ve spoken to a gentleman at a financial mortgage bankers Corp. about a hard money loan for a buy and flip property. He told me what I have in the bank is not enough to cover hard money loan fees (such as interest and down payment) but I’ve read and listened to podcasts that stated I don’t need so much to start. I wanted to use a hard money loan to buy and renovate the property however he told me I need to fund the down payment, closing costs, and renovation on my own and then they reimburse the money for renovations once the renovations are complete. I unfortunately don’t have enough money to renovate a property so I thought that buying and flipping wasn’t not for me. However BiggerPockets has me thinking it is possible. Unfortunately I have tried to raise money from friends and family but of course as a beginner, no one believes in me yet. So my question is:

1) Is there such thing as hard money loans that can fund the deal and renovations at the beginning of the deal?

2) How else can I fund renovations if I can’t find a hard money loan that’ll fund the deal from the start?

Fees for Hard money vary based on lender, size of loan and how much they are funding. 90% funding on the purchase and rehab is easy enough to find if you have some experience, 100% will be rare.

You will have to pay closing costs (things like insurance, appraisal, title insurance) plus some lender fees, they will vary greatly between lenders and products. After closing costs and fees you could easily pay 5% to 10% of the loan amount.

You will probably need 6 month reserves that covers taxes monthly payment.

Hard money lenders usually require you to start rehab out of your own pocket. The money is released in increments, called draws, as the work is completed. If you have a 45k rehab you bring 5k, the lender brings the other 40k. You start the project with your money then they give you the 40k in chunks called "draws." A plan is set up before for your rehab as to when you get that money. Usually it is as you complete various items, then they give you another chunk of the money and you complete more of the rehab and then get another portion of the money and so on.

Thanks so much! So it seems I have to have reserves in the bank even when dealing with hard money loans. Maybe fix and flip is not for me? I have about 33k in the bank to invest in real estate but I don't think that would cover working with a hard money loaner since I have to cover the rehab at the beginning and closing costs. I was thinking about a private money lender to work with but I don't know any myself. Maybe I should look into a private money institution?

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Christian Rodriguez

OP

Real Estate Broker · NY · Member since 2018 · 30 posts · 3 votes

7y

Originally posted by @Diana Muresan:

None of the renovation loans require you to hold the loans, that’s absolutely not true, it is false!!! That’s not allowed on the conventional market. I refinance them myself after 6 months once repairs are done if they build 20% in equity so we can get rid of the Mortgage Ins, that’s in case you want to hold on it, otherwise you just sell it. Bankers loose their compensation if a buyer refinances after making less than 5 payments on the loan which is not the case on the flipper either since you need time to get permits, do the work and finally sell it.

FHA 203 k is for owner occupied, many buyers use the loan and Sell after repairs, obviously no one lives in the unit during the repairs and mortgage payments are actually rolled in the loan during the construction, so technically is owner occupied by is really an empty unit during construction and you are free to sell after.

It's just a matter of figuring out if you can do. FannieMae HomeStyle or a 203k FHA.

Let me know if I can assist you in any way

Thanks Diana and Bill! I am a bit confused on what you are saying can you elaborate on the specificity of the loans you are speaking about? You are mentioning the 203k loan which requires me to live in the property for x amount of time. I wanted to avoid that at the beginning because I only have about 33k in the bank and if I get into a 203k I need to put in money towards the house that I won't be able to get back until after a year, if the property is sold. I will then not really have much money left for further investing until then. That is why I wanted to get into fixing and flipping first. However you are more experienced than me. What do you think I should start off with? Is it a bad idea to try to use a hard money loan on my first property, which in fact would be a fix and flip property? What do you think may be a smarter way to approach real estate as a first time investor with not much in the bank. Also, which renovation loans are you talking about that do not require me to live in the property?

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Diana Muresan

Lender · Chicago, IL · Member since 2018 · 352 posts · 147 votes

7y

You can flip with both 203k FHA and FannieMae HomeStyle.

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Kenneth R Gomes

Bayville, N.J. · Member since 2018 · 1 post · 0 votes

7y

Hi Diana,

I am a contractor who is looking to get into the fix and flip business in my area of N.J.

The only thing that is stopping me right now is how I am going to finance my first deal, I only have about 35k that i can invest. Do you have any suggestions?? I would appreciate any advice you can give.

Thank You,

Ken

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Caleb Jordan

Lender · Arlington, TX · Member since 2018 · 465 posts · 184 votes

7y

Originally posted by @Christian Rodriguez:

Originally posted by @Diana Muresan:

None of the renovation loans require you to hold the loans, that’s absolutely not true, it is false!!! That’s not allowed on the conventional market. I refinance them myself after 6 months once repairs are done if they build 20% in equity so we can get rid of the Mortgage Ins, that’s in case you want to hold on it, otherwise you just sell it. Bankers loose their compensation if a buyer refinances after making less than 5 payments on the loan which is not the case on the flipper either since you need time to get permits, do the work and finally sell it.

FHA 203 k is for owner occupied, many buyers use the loan and Sell after repairs, obviously no one lives in the unit during the repairs and mortgage payments are actually rolled in the loan during the construction, so technically is owner occupied by is really an empty unit during construction and you are free to sell after.

It's just a matter of figuring out if you can do. FannieMae HomeStyle or a 203k FHA.

Let me know if I can assist you in any way

Thanks Diana and Bill! I am a bit confused on what you are saying can you elaborate on the specificity of the loans you are speaking about? You are mentioning the 203k loan which requires me to live in the property for x amount of time. I wanted to avoid that at the beginning because I only have about 33k in the bank and if I get into a 203k I need to put in money towards the house that I won't be able to get back until after a year, if the property is sold. I will then not really have much money left for further investing until then. That is why I wanted to get into fixing and flipping first. However you are more experienced than me. What do you think I should start off with? Is it a bad idea to try to use a hard money loan on my first property, which in fact would be a fix and flip property? What do you think may be a smarter way to approach real estate as a first time investor with not much in the bank. Also, which renovation loans are you talking about that do not require me to live in the property?

33k may be enough for a flip loan, if you could find a property where your purchase and rehab cost was around 100k maybe more epending on the ltv and how much your monthly costs are which determine reserves.

203k does not work well if you are trying to move a house in a few months. Longer term it may be an option.

You can technically sell an fha home in less than 6

You sign an affidavit on an FHA loan that you INTEND to occupy as an owner occupent for a year. If something comes up and you have to sell in less than a year that is fine. If your intent from the beginning is to sell sooner than a year then that is starting to cross the line into fraud.

I do not know if the 203k is different at all in that regard from a normal FHA loan.

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Bill Rich

Lender · Marlton, NJ · Member since 2016 · 126 posts · 44 votes

7y

Caleb is 100% correct. If you are buying the property and not intending to live in the property its fraud. Once repairs are completed you are required to live in the home. If FHA comes out after the final inspection has been completed the renovation has been closed and they find no evidence of you occupying the home they will investigate further and could and would most likely call the loan immediately. I have seen it happen first hand. Sure you can roll the dice and see if you can get away and I am sure there have been people who have. It is a big risk though.

Neither program is designed as a flip program, both FHA and Fannie Mae acknowledge that. Yes you can certainly take the approach to flip the property and could have no issues . BUT there is also the risk of getting caught, especially if tying to pass the properties as owner occupied.

@Christian

To answer your question, lenders are required to hold loans on their books for a period of time for at least 6 months. It is an internal requirement, not something the consumer would see as a prepayment penalty for they are not allowed. If the loan were to be paid off either through a refinance or being sold the lender has to pay a penalty to their investor. I will emphasize it is not a penalty that you the consumer would pay at all. That said, if the loan is paid off early, we as the lender pay a penalty for not having that loan open for the required period of time. Hence the reason the 203k and HomeStyle are not a program designed for flipping. If you tell a lender you are intending to flip the property most probably would not do the loan for the above mentioned reason. That is why there are programs specifically designed for flipping "fix and flip financing". These loans are designed to be paid off as soon as possible.

I have been origination both renovation, construction, flip and regular mortgages for over a decade and can address any questions you have.

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Will Long

Flipper/Rehabber · Roanoke, VA · Member since 2018 · 67 posts · 64 votes

7y

@Christian Rodriguez Reach out to Marc Brown at BTS Funding. He’s an hard money broker based in Philly. I don’t have his number available but if you go to the website btsfunding.com, the number and email is on there. Tell him Will Long from the BTS real estate league referred you.

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Michael Ward

Real Estate Broker · Fayetteville, AR · Member since 2018 · 75 posts · 50 votes

7y

@Christian Rodriguez, find some commercial lenders who do construction loans. If you’re looking at cheap houses at a below market sales price, you can get a loan to purchase the property and fund renovation costs based on the finished appraised value wIthout any down payment. Not all lenders will do it, so you have to find the banks that are active in construction loans, which are short term, interest only loans to be paid off in a matter of months. I just bought my first deal like that . $70k sales prIce, estimated $10k in repairs, $100k finished value. The loan terms were 85% of finished value, so as long as I don’t spend more than $15k, I don’t spend any of my own money at all

1 Reply

Christian Rodriguez

OP

Real Estate Broker · NY · Member since 2018 · 30 posts · 3 votes

7y

Thanks @Michael Ward, that sounds like a solution. Which bank did you use that does this loan you speak of. Also, what is the loan you speak of called?

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Michael Ward

Real Estate Broker · Fayetteville, AR · Member since 2018 · 75 posts · 50 votes

7y

I used a regional bank in Arkansas, where I'm located, and it's just a construction loan. A construction loan typically requires that the borrower only pay interest on the loan for maximum period of time, which varies depending on the project. In my case, I have up to 12 months, at which the loan principle will be due. A borrower must either sell (in a flip scenario) or refinance (in a buy and hold scenario) to pay off the original construction loan.

2 Reply

Dustin Davis

Goshen, AR · Member since 2017 · 267 posts · 159 votes

7y

@Michael Ward @Christian Rodriguez on the subject of commercial loans as It related to buy and hold you can also ask that it automatically convert to a 3, 5, or 7 year product when it matures to avoid typical refinance costs...

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Andrew SyriosPro Member

Moderator

Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes

7y

There are hard money lenders who will fund the renovations, but they're generally expensive. Other (and cheaper options) include finding ma and pa private lenders or a money partner where you bring the deal and do the work and they bring the money and you split the equity.

Podcast Guest on Show #121

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Buy & Flip with Hard Money Loans

Buy & Flip with Hard Money Loans

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