Lending/Financing Options for a Flip

4 Replies

Hi there! I have done 3 live-in flips in my local market but am currently on the hunt to do my first "professional" flip. I'm wondering if anyone can advise me the benefits of using a hard money lender versus conventional financing to fund the purchase & rehab. I believe we have the funds to cover the down payment and the rehab although I'd love to leverage financing as much as possible because it'll be cutting it tight with the funds I have available. Thanks for your help!

Originally posted by @Molly Arnott :

Hi there! I have done 3 live-in flips in my local market but am currently on the hunt to do my first "professional" flip. I'm wondering if anyone can advise me the benefits of using a hard money lender versus conventional financing to fund the purchase & rehab. I believe we have the funds to cover the down payment and the rehab although I'd love to leverage financing as much as possible because it'll be cutting it tight with the funds I have available. Thanks for your help!

I know a few people who specialize in finding properties right in that gray area between "you MUST use HML" and "oh you can get a vanilla Fannie type loan no problem."

They finance them with vanilla Fannie loans.

They do things like throw a functional water heater in 2 days before the appraiser shows up.

But usually it's not that simple. And sometimes they lose, are out the appraisal fee, and can't close but with hard money.

Because they aren't paying those 2 or 5 hard money points upfront, they can offer more than all the HML-backed buyers, allowing them to win out while still maximizing net profit when they go to sell.

It's a niche.

@Molly Arnott I certainly feel that there are some very specific differences between Hard Money and Conventional Financing.  I'll try to break them out seperately and then give some more follow up too.

  • Hard Money Lending - Can wrap in renovation costs. A temporary loan (so you will have to refinance). High costs when comparing to other loan types. But the 2 main reasons why Hard Money is so great - Fast Closings and the loan is based off the ARV of the property. Meaning, if you could "buy and rehab" at 70% ARV...then in theory, you could come out of pocket $0. Really big advantage with that element.
  • Conventional Lending - Slower closing (MUCH slower). A permanent loan (30 year fixed), so no need to refinance. Can still roll in renovations but more paperwork. Lower closing costs, loan will ALWAYS need a downpayment though. Minimum downpayment is 15%. So even if you do buy and rehab at 70% ARV...you will still need a 15% downpayment of your purchase price + rehab costs.

The main crux that most of these scenarios come down to is "how can I close quickly" and "what's my lowest out of pocket costs".  And the answer to both of those questions usually is to use Hard Money.  So while their closing costs might be higher, coming out of pocket less and closing quicker is usually the solution that we need when buying an off market property.  I hope all of this makes sense.

Feel free to ask anything additional if you need.  Thanks!

@Molly Arnott

Hard money is more expensive, but moves much faster than conventional financing.  Incidentally, there are usually no up front points with hard money and if someone wants you to pay points that go no where (meaning they don't go toward the cost of the appraisal and a nominal background fee), go find someone else to use.  Upfront points or a full on application fee before any qualification is done is a scam.

A lot of good responses above, but there are also typically more options available through hard money. It could be, as Andrew mentioned, rolling rehab costs into the loan, or other upfront costs plus conventional doesn't typical come with funds for rehab at all on a non-owner occupied property. Feel free to reach out if you want a better idea of your particular situation

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