Exit Strategies in my Flip does not Happen within terms of HM loa

8 Replies

Hi:

Ok, so I'm about to embark upon making my first investment purchase but I have a nagging question in the back of my mind that seems to be bugging me all the time. If I make a solid purchase of a SF property, with solid numbers ( purchase price, rehab costs, ARV, etc) and my goal is to use hard money or private money to purchase and rehab the property and then flip it, what are exit strategy options if it does not flip within the terms of the HM/PM loan?

Another words, if I take out a HM loan for 12 months, interest only say and I do not flip it as anticipated, are there exit strategies that BP members can suggest to pay off the HM/PM loan in full....
 

Just trying to anticipate all the issues and be prepared accordingly.

Thanks BP

Your other exit strategy is to refinance to a much cheaper loan, meaning a conventional loan. Without specific numbers there’s so may to know if that’d work, but it can work when done properly. That method is called the BRRR strategy on here.

For example, but something with an ARV of 100k for 50k. Spend 25k on rehab and holding costs and then refinance out your 75k while maintaining 25k equity. Then use the 75k to pay off hard money loan

Originally posted by @Caleb Heimsoth :

Your other exit strategy is to refinance to a much cheaper loan, meaning a conventional loan. Without specific numbers there's so may to know if that'd work, but it can work when done properly. That method is called the BRRR strategy on here.

For example, but something with an ARV of 100k for 50k. Spend 25k on rehab and holding costs and then refinance out your 75k while maintaining 25k equity. Then use the 75k to pay off hard money loan

Originally posted by @Stephen Turner:
Originally posted by @Caleb Heimsoth:

Your other exit strategy is to refinance to a much cheaper loan, meaning a conventional loan. Without specific numbers there's so may to know if that'd work, but it can work when done properly. That method is called the BRRR strategy on here.

For example, but something with an ARV of 100k for 50k. Spend 25k on rehab and holding costs and then refinance out your 75k while maintaining 25k equity. Then use the 75k to pay off hard money loan

@Caleb Heimsoth:  Thanks Caleb...Just so I'm clear, if the HardMoney Lender holds the first lien position, then I can then refinance the loan as I will be listed as the owner on the Deed of Trust? Is that right?

It's your house if you have purchased it and have taken a hard money loan on it. The HML doesn't have anything to do with your ownership.

If, after 12 months, you haven't flipped the property, you may want to rethink your strategy as a flipper!  lol.  That's a long time to hold a property as the interest on the hard money alone will be a hefty expense that racks up the longer you hold the property.  The whole point to a flip is quick turnaround.  

NOW, let's say you decide after the rehab is done that you would rather HOLD the property as a rental. In that case, you can contact a traditional lender who offers conventional financing and refinance it. By refinancing it, you will pay off the HML, and replace it with a better rate and term loan for the long term.

Originally posted by @Cara Lonsdale :

It's your house if you have purchased it and have taken a hard money loan on it. The HML doesn't have anything to do with your ownership.

If, after 12 months, you haven't flipped the property, you may want to rethink your strategy as a flipper!  lol.  That's a long time to hold a property as the interest on the hard money alone will be a hefty expense that racks up the longer you hold the property.  The whole point to a flip is quick turnaround.  

NOW, let's say you decide after the rehab is done that you would rather HOLD the property as a rental. In that case, you can contact a traditional lender who offers conventional financing and refinance it. By refinancing it, you will pay off the HML, and replace it with a better rate and term loan for the long term.

Thanks @Cara Lonsdale, yes the 12 month time frame would be extreme and require a total review of my business model... agreed . I'm just making sure I have all different options thoroughly understood to prevent falling into an expensive decision as a default

Originally posted by @Stephen Turner :
Originally posted by @Cara Lonsdale:

It's your house if you have purchased it and have taken a hard money loan on it. The HML doesn't have anything to do with your ownership.

If, after 12 months, you haven't flipped the property, you may want to rethink your strategy as a flipper!  lol.  That's a long time to hold a property as the interest on the hard money alone will be a hefty expense that racks up the longer you hold the property.  The whole point to a flip is quick turnaround.  

NOW, let's say you decide after the rehab is done that you would rather HOLD the property as a rental. In that case, you can contact a traditional lender who offers conventional financing and refinance it. By refinancing it, you will pay off the HML, and replace it with a better rate and term loan for the long term.

Thanks @Cara Lonsdale, yes the 12 month time frame would be extreme and require a total review of my business model... agreed . I'm just making sure I have all different options thoroughly understood to prevent falling into an expensive decision as a default

Many of the HMLs will allow for extensions too. You usually will pay a fee to extend. As long as the figures still work and the property hasn't depreciated, the HML is usually acceptable to extend.

One thing that may ease your decision to jump in....

If you are strategic about the properties that you choose, and only choose properties that you could also rent out at a cash flow, then if the flip isn't a success, you can turn it into a BRRRR. It still doesn't solve your HML issue unless you refi. However, it solves your "What if I buy a property to flip and the rehab is more than I planned" problem.

It's always good to have a back up plan.

@Stephen Turner Agree with all the replies. Many HML/PML allow for extensions if your plan needs to shift a bit, which can allow for a little more time to either refi (for a cheaper loan), or simply allow for more time to finish up rehab & list on the market/sell.

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