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How To Get Money To Flip A House

How To Get Money To Flip A House

If you’re Googling the phrase “How To Get Money To Flip A House“, this post should help! Flipping houses will involve purchasing a low cost home which are often foreclosures, fixing it up and then selling it for a profit. It is something that has a lot of risks as well as plenty of rewards. There is also a lot of work that is involved with preparing a house to go on the market. If you have become interested in flipping homes but don’t have much money for a down payment, there are some other options out there that will let you enter a house flipping market.

Method 1 – Evaluation of your financials

  1. Evaluating your risk tolerance.

Being able to Flip a home for profit will involve various costs, which include the down payment, interest payments, real estate closing costs, contractor fees, permits, inspections, property taxes, and mortgage. These costs will often add up quickly, and your flipped house may not sell at a profit. Before you ever decide if you want to flip a house, you need to ask yourself:

  • What will you do if the house doesn’t sell quickly? Would it be possible to use the home as a rental property? If you don’t have a reasonable back up plan to use if something goes wrong, then you may want to reevaluate the plan.
  • Are the potential profits worth the risk of a big loss? In 2015, houses that were priced below $50k saw negative returns while homes that were priced between $100k and $200k had an average gross return of 44%. So, keep in mind that selling a house in which you haven’t lived in may also have high tax payments, which could cause the profit margin to lower a lot.
  • Can the investment partners deal with the risk of a potential loss?
  • Have you done research on the local real estate markets, permits and remodeling costs? In order for there to be a successful house flip, you will need to educate yourself on the local home pricing, responsible contractors, real estate regulations and school districts.
  1. Consider sweat equity and value of that work that you can provide.

Sweat equity is the amount of value that you may add to the home due to your own labor. For instance, if you are a licensed plumber or skilled technician, then you may be able to complete a few home repairs on your own. This cuts down on the overhead and reduces the amount of money that you need to borrow.

  • Ensure that you are taking into account how much time you will be working on the flipped house. Time is valuable, and flipping a house can take months of work. Consider if other ways of spending your time may be more enjoyable or lucrative.
  • Ensure that you are adhering to local regulations when you do home repairs yourself. Discuss the plans with local regulations board or a real estate attorney if you need approval for any repairs or construction.
  • Will your partners put up the financial stake while considering if your sweat equity has value? If so, how much value when compared to hard cash?
  1. Know your credit score.

If you don’t have money for a flipped house, you will need to get a loan to cover the initial costs. No matter who the lender is such as a private lender, a partner or a bank, you will have to demonstrate that you have the capability of repaying the loan. Your credit score will reflect on your credit history, and your ability to pay off loans as well as your overall debt load. The better the credit score, then your chances will be that you will be able to secure a loan at affordable interest rates.

  • There are a few credit rating systems, but normally the general credit score is between 300 to 850. The higher the score, the better your credit is.
  • You can receive a free credit report with your credit score, every 12 months by going to https://www.annualcreditreport.com/index.action.
  1. Improving your credit score.

If you have a credit score that is too low for you to be able to secure a loan for house flipping, then you may want to take a bit of time to improve your credit score. This may take some time, but it could be worthwhile in the long run. The better the credit score, then you may actually be able to handle any type of potential loss from your planned house flipping. In order to improve your credit score, you may:

  • Pay your debts off in a timely manner. If you don’t have a good debt payment history, then you won’t get a decent loan for any type of flipped house.
  • Keep debt to a minimum amount. Avoid maintaining a balance on your credit card if you can.
  • Only have a credit line when needed. Do not have more credit cards than you need for your day to day life.
  • Protect your identity. Be sure to monitor your credit card transaction and your credit rating to ensure that your identity hasn’t been stolen by a hacker or thief. Take reasonable safety precautions to protect your personal information. For instance, don’t log on to your online banking system unless you are on a password protected, secure network.
  1. Talk to financial advisors.

Financial advisors are able to look at your current financial situation and then help you to determine just how much risk you can afford to take on during a house flipping investment. Your financial advisor may help to prepare a plan for being able to meet expenses if the house takes a long time to sell or if it needs to have extra repairs done.

  1. Make a business plan.

To be able to successfully flip a house, you will need to have made your decisions based on research and logic, and not emotions. Before you start the process of finding a lender and buying the house, it is best that you have a solid business plan. This plan should keep you on track for making a wise investment as well as provide confidence to any potential lenders and partners that can help to make a profit. Your business plan needs to include:

  • Maximum purchase price of the flipped home.
  • List of in demand neighborhoods where your search is targeted. Pay attention to neighborhood safety, school districts, and amenities proximity like public transit and shops.
  • Maximum cost of remodels and repairs that you can afford.
  • List of affordable, licensed and dependable contractors for successful repairs.
  • Reasonable estimate for After repair value of the home. The initial price should be no more than 70% of the homes after repair value.
  • A sense of who the buyer is and what they are wanting. Will the buyer be retired? A young businessperson? A newlywed couple with children? Depending on the neighborhood, your buyers may want different things out of a home. Consider who the buyer will be and what they will need out of the house. For instance, if you are flipping a house in a neighborhood that has a great school district, you may consider remodeling with young children in mind.
  • Specific buyer. In some cases, you may have a buyer lined up before the house is flipped. In this case, the risks are lower than overhead costs.
  • Repayment plan for the loan if something goes wrong. Don’t flip a house unless you can meet expenses, even if something goes wrong with the sale. For instance, a buyer falls through, or you discover an issue with the foundation. Build a margin for error within the business plan and brainstorm ways that you can deal with the sale delay or unexpected expenses.

Method 2 – Finding An Investment Partner

  1. Locate an investment partner.

A common way for house flippers that are inexperienced to enter into this market is to find investment partners. This is important for those who don’t have money for a down payment or initial repairs. Investment partners will supply some or even all of the start up cash in exchange for a part of the profits.

  • You may want to consider finding a partner who has a lot of liquid cash but no interest in doing the legwork of refinishing or purchasing a home. While the partner supplies the cash, you are supplying the labor and know how.
  1. Network Actively.

To be able to find an investment partner, you will need to have various professional and personal contacts in the community. Spread the word that you are interested in an investment opportunity with a partner. Some ways that you can find a potential partner do include:

  • Looking for any active investors in real estate. Contact successful, and experienced investors of real estate who may take a chance with you.
  • Join real estate investment clubs. Most communities will have local chapters. Once you join, you will have access to locals who are wanting to share your enthusiasm and interest.
  • Join meetup groups. Meet up groups are social clubs that will sometimes have specific themes such as real estate. Use meet up groups to extend your social network.
  • Spread the word through friends and family. Discuss your dream of house flipping with those who are in your social network. They may be able to put you in touch with others who have your interests or are looking to invest in real estate.
  • Create a real estate investment club. If your neighborhood doesn’t have one, then form your own chapter. Advertise on Craigslist and through various meet up websites to find investors.
  1. Consult with an attorney.

Whenever you enter into an investment partnership, it is vital that you don’t rely on verbal agreements. Ensure that your transactions are within a signed contract. Consult with a real estate or business attorney to make sure that everyone is okay with the arrangement. Make sure that everything is worked out in advance:

  • Who covers what costs
  • Who covers potential liabilities and debts
  • How profits will be split
  • Who will do certain tasks like contractor hiring
  • Be aware of security laws that are in place to help regulate the promotion of various types of investments and the overall possibility of lawsuits by investors, if the events do not happen as planned.
  1. Take only one deal at a time.

There are some real estate partnerships that work out great, while others may fail. Don’t put yourself into a long term partnership until you know how well that you will work with your partner. Take it one house a time and evaluate if the partnership has the potential to be a lasting and strong one. Also take into account if the financial return will work as expected.

Method 3 – Apply For A Hard Money Loan

  1. Research Hard money lenders.

Hard money lenders are companies that borrows money from various individuals at a single interest rate and loans the money to other individuals at a higher interest rate. There are a lot of companies that specialize in funding real estate investments like flipped houses. Use internet directories or your social network to locate a hard money lender in your area.

  1. Recognize added costs of hard money loans.

Hard money loans are likely to be an easy loan to get for a first time home flipper who doesn’t have liquid cash. But, it is also a risky option. The interest rate from a hard money loan is much higher than your average bank mortgage of 8 to 15%. That can really cut into the profits of a flipped house. Read How To Use Hard Money For Fix and Flips.

  1. Collect financial documents.

Before a lender will give you the cash, you will have to provide them with proof about your financial stability as well as plans for flipping the home. They will want to look at tax records, credit ratings, as well as pay stubs. Be sure to have your documents ready to show your lender that you are worth the investment.

  1. Pay initial 2 to 10% fee.

This is another added cost of hard money loans. It is often referred to as points and many of the fees are between 2% and 10% of the mortgage cost of the house that you will be flipping. This money will provide your lender with a bit of security and will serve as a demonstration of financial viability.

  1. Flip the house quickly.

Many hard money loans will be limited to the purchase as well as rehabilitation of the property and/or construction and may last from 6-24 months. Hard money loans are not best for long term investments due to the high fees that are involved. It is best to use a hard money loan for properties that you can turn around quickly to make sure that you aren’t paying through the roof interest rates.

Method 4 – Apply For A Private Loan

  1. Consider a private lender.

Private lenders are people who have liquid money to spare who can lend you money at a certain interest rate, also known as “Private Money Loans“. Unlike a real estate partner who will split the profits, a private lender will charge and interest rate before giving you cash. In most case, the interest rates are much lower than hard money loans, but a private lender may be harder to find.

  1. Tap into your social network for private lenders.

In most cases, you may find a private lender through your social network. If you someone who has liquid cash sitting around, you may be able to borrow money and then pay them interest. In the best scenario, everybody will win. Your lender will earn extra interest and you will make profit from the house.

  1. Be aware of any potential risks.

If you are going to use a private lender, then ensure that you both are aware of the risks of the transaction. Consider what may happen if you don’t profit from the house. Will you still be able to make interest payments? Think the options through before going to a private lender to be able to preserve the relationship with that person, you will need to pay them back in a timely way.

  1. Trust is key.

Don’t take advantage of a private lender if you want to work with them continuously. Trust will be a big part of a private loan and you will have to show that you are able to hold up your end of the agreement. If you are successful, your lender may be willing to help finance any future real estate investments.

Method 5 – Try To Get A Bank Loan

  1. Ask the bank for a loan.

The option is less likely to happen on your first flipping experience, but it is worth trying. If you have a solid business plan and a good credit score, your bank may be able to provide a loan to purchase a house to flip. The interest rates may be higher than normal mortgages with a 20% down payment, but it is lower than a hard money loan.

  • Banks are may lend construction funds if you are able to provide a clear lien for the property.
  1. Discuss your business plan with the bank.

If you have any hope for securing a bank loan, you will need a very solid business plan. Ensure that you have discussed your research with your bank to see if they will consider the house a good investment.

Method 6 – Using your own assets

  1. Evaluate your current assets.

If you don’t have a lot of liquid cash to flip a house with, you may still have assets that may help you to gain credit lines to purchase a low cost home. Examine your home, your credit lines and retirement accounts to see if they can be tapped into for a down payment.

  1. Tap into your IRA.

Your IRA is a retirement vehicle. There are some large tax penalties when it comes to withdrawing the money before you are 66. But, there are exceptions for first time home buyers. You can use up to $10k of your IRA to purchase a home. Talk the option over with your financial advisor to ensure that you will be using the money right and that you will not have penalties.

  • Be aware that withdrawing money from the IRA could hurt the growth potential over a long time of your account. Be aware of the risks that are involved with taking money from your account too early.
  1. Consider a home equity line of credit.

Home Equity Line of Credit is an option if you already own property. This gives you a fast source of cash, and you only have to pay the interest on the money that is borrowed. For instance, if you have a home equity line of credit for $75k, but you only borrow $10k, then you will only pay interest on the $10k.

  • Be aware that home equity line of credit interest rates is higher than private lender loans.
  • Be careful. If you don’t repay the loan in a timely manner, you could lose your home.
  1. Consider using credit cards.

Credit cards are a source for quick cash, as long as you are planning to pay them off quickly. The interest rates for credit cards can be between 18% and 24%. You are also not placing other assets are risk, like with a home equity line of credit. You may want to consider using credit cards for the lower stake purchases during your home flipping, such as to purchase various building materials from various home good stores.

Finding Hard Money Loans In Arizona

If you are looking to flip houses in Arizona, apply for a hard money loan with Brad Loans by eMortgage, Inc.

What Are Points On A Hard Money Loan?

What Are Points On A Hard Money Loan

What Are Points On A Hard Money Loan

If you’re searching the question “What Are Points On A Hard Money Loan?” you are looking for a better understanding of the inner workings of the hard money lending process.  This post is made to help you better understand what points are and how they related to hard money lending.

Fee Based Income on Hard Money Loans

In addition to interest, a hard money loan has other fees charged by the lender. These fees are a source of income for the hard money loan lenders, therefore it is important to fully understand the income sources of lenders so you have a fair negotiation process, which is how you will obtain the best term and rates.

Points:

A percentage of the total loan amount is calculated. One point equals one percent of a loan. Depending on the lender, some hard money lenders will charge points to simplify the closing costs without providing details of separate underwriting fees, or others. Also, some lenders will charge additional points besides these fees. The charged amount will depend on transactions and agreements between the involved parties, risk, complexity and loan-to-value (LTV).

Example:

You have a $500,000 loan, and you are charged 3 points (3%), totally $15,000. These points are often referred to as ‘up front’ points since they are included in closing costs and get disbursed during the tart of your hard money loan, rather than being collected over the span of the loan. However, there are situations when hard money lenders might agree to pay referral fees to another hard money lender for sending you or private investors. Furthermore, lenders might agree on sharing part of the points collected with private investors.

Possible example of up front point distribution:

-$4,000 to private investor for increasing yields

-$3,000 to referring hard money broker

-$8,000 to hard money lender

Underwriting Fees and Other Fees

These fees get charged to you as an additional cost that increase the points of a hard money loan. With private lenders, some will charge them, others will not. Although certain fees just ‘pass through’ hard money lenders, including credit report fees and appraisal fees, others are additional compensation sources.

Example:

Underwriting Fees – This is a flat fee, generally ranging between $750 to $2,500 and is charged to hard money loans. Overall price depends on the complexity. There are cases where this fee gets incorporated in the points charged, but it could also be charged as a separate addition.

Processing Fees – This is a flat rate that is charged for the processing of a loan.

Doc Prep Fees – This is a flat rate charged for the loan document preparation. There are cases when these fees are simply passing through due to hard money lenders using private companies or creating documents, while other times the fee will be a source of additional income for the PML.

Referral Fees

This is an agreed loan percentage or dollar amount between the referred business and hard money lender. If you got referred to the hard money lender, it is likely that referral fees are part of the fees you will be paying to the lender. Because of specialized nature behind private money lending, every hard money lender is not able to provide ‘all things to all clients’. The funds they lend get decided on by investors that they represent. Thus, referral fees are a common factor.

Loan Servicing

This is a fee paid by the investor to a PML, if they are servicing the loan. A PML will retrieve your payment, maintains all required records, then provides you an applicable report. The servicing fee varies; some may be a flat rate while others charge a percentage of a loan balance. For example, 0.25% to 1% of original loan, which is calculated annually and collected monthly.

Late Fees

Another source of income hard money lenders collect are late fees, which occur if you make payments after the specified date within your promissory note. Late fees are often split with an investor (50/50), this is paid upon you paying the fee.

Foreclosure Fees

This fee is generated when a foreclosure occurs, sometimes being paid to a hard money lender, but not always. There are various PML that offer foreclosure services, thus act as a source of profit revenue or hard money lending companies. However, there are other situations where hard money lenders outsource the entire foreclosure service, and do not collect any revenue from foreclosure fees. Usually, this type of income does not get split with investors.

Renewal Fees

This is a fee that you pay for renewing your current loan with mutual consent from a private investor. Investors will likely be willing to renew your loan if you are a quality borrower who pays on time. This maintains their funds earned. Renewal frees are commonly paid by the borrower, either up front or as additional cost to the loan principal.

Each hard money lender has a business structure slightly different than another. The profit revenue may come from a single source, or a combination of the above sources. Keep in mind that nothing is set in stone, and fees of a hard money loan can be negotiated.

By having a better understanding of fees in association with a hard money loan, you will be able to negotiate a better rate for your loan. You can improve negotiation position by having a great track record, low LTV and high collateral, which can result in a much lower cost.

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Phoenix Valley Hard Money Lending

If you’re looking for a hard money loan in the Phoenix Valley, Brad Loans can help.  We finance both investors and owner occupant purchases with up to 100% loan to value with cross collateral.  That means you could get a loan with little to nothing down with the right combination of collateral.  Brad Loans has helped thousands of Arizona residents get the money they need for fix and flips, bridge loans, home purchases, or other real estate endeavors. To learn more about what Brad Loans can do for you fill out a hard money loan application or give us a call at 480-948-0880.

Hard Money Guide

Hard Money Guide

Hard Money Guide When hearing “hard money loan” or the words “private money loan”, what is your initial thought?

In the past there have been some shady lenders that tarnished the industry of hard money lending when some predatory lenders attempted a ‘loan-to-own’ method that provided loans that were quite risky to borrowers who use real estate for collateral, which the intention was for the properties to be foreclosed. Fortunately, those dark alley lenders making sky-high interest loans are a thing of the past and do not exist in hard money lending today. However, there remains a certain residual stigma for real estate investors that have not used recent services of a reputable hard money lender.

Within this article, the basics will be covered regarding hard money loans, it includes:

What’s a Hard Money Loan?

In simple terms, hard money loans are short-term loans that are secured with real estate. Funds come from private investors, or fund of investors, rather than a conventional lender like a credit union or bank. Generally, terms average 12 months, but the loan term may be extended to a longer term of 2 to 5 years. Hard money loans require borrowers to make a monthly payment to cover just the interest, or interest plus a portion of the principle. At the end of the term, making a balloon payment is common.

When it comes to the overall amount that hard money lenders can lend a borrower is mainly based on the overall value of the subject property. Properties can include already owned property the borrower would like to use for collateral, or it could be a property being acquired by the borrower.

A hard money lender is mostly concerned with the property value, instead of credit score of the borrower. However, credit score remains a partial factor. A borrower that is not able to obtain a conventional loan because of recently foreclosing, or a short sale may still be able to obtain a hard money loan with a sufficient amount of equity in a property which is used for collateral. When banks tell you “No”, hard money lenders may tell you “Yes”.

Types of Property for Hard Money Loans

Borrower are able to obtain hard money loans on just about any property type, including single-family or multi-family residential property, commercial property, industrial property, even land.

There are some hard money lenders which will specialize in a certain type of property, such as residential, and be unable to provide land loans, just due to their lack of experience with the area. The majority of hard money lenders will have a certain loan niche that they are comfortable with. It is important to ask ahead of time which loan types they are able and willing to do.

Furthermore, there are many hard money lenders that refuse to make deals using owner-occupied residential property because of additional regulation and rules. However, there are some that do not mind wading through paper work. Any hard money lender will be willing to do loans in the 1st position, however there are less that are willing to do 2nd position loans because the risk to the lender is increased.

What Types of Situations Should Hard Money Loan Be Used For?

While hard money loans can be helpful, they are not the appropriate approach for all situations. When you are planning to purchase a primary residence, have good credit, an income history, and no problems such as foreclosure or short sale, the best approach for the borrower would be to use a conventional financing method with a bank, if there is time to go through the lengthy process of approval that banks require. However, when conventional financing through a bank is not an available option, or you need the loan in a shorter time period, hard money loans may be the appropriate approach.

The following are ideal situations for hard money loans:

  • Land Loans
  • House Flipping
  • When borrower has issues with credit
  • Construction Loans
  • When real estate investors require fast action

Who Should Use Hard Money Loans?

Hard money loans are used by real estate investors for various reasons. However, the main reason behind using a hard money loan is the quick process of obtaining funds. It is common for hard money loans to have funds available within a week, compared to 30 to 45 days from a loan funded by a bank. The hard money loan application process usually takes one to two days, while some loans may be approved the same day. With a bank loan, you are lucky to hear back about the approval the same week.

Being able to obtain funds at a quicker rate compared to a traditional bank loan provides a large advantage for the real estate investor, especially as real estate investors attempt to acquire properties that have numerous competing bids. Therefore, a quick close using hard money loans can be used to obtain the attention of sellers, setting offers apart from other buyers using a slower conventional method.

Although, another popular reason for investors using hard money loans is that a bank has rejected their application for a conventional loan. Because things do not always happen as planned, things in the past can prevent banks from approving a loan, including foreclosures, short sales, and credit problems. Also, banks require an income history. If the borrower has recently obtained a new job, this may cause banks to deny a loan request simply because f insufficient income history. The bank does not focus as much on a health income amount, as they do the income history. However, a hard money lender is able to assist with a loan without stressing over these areas, long as loans are repaid and the equity value of the property is enough.

Hard Money Loan Interest Rates and Points

When it comes to the interest rates and points that hard money lenders charge, it varies between lenders and region. For instance, a hard money lender located in California will often have a lower rate than lenders located in other areas of the country, because there are many hard money lenders in California. Due to an increase in competition, prices decrease.

Compared to a conventional bank loan, hard money lenders have a higher risk rate when loaning funds. Because of this increased risk, hard money loans tend to have a higher interest rate than your conventional loans. A hard money loan can have an interest rate ranging between 10% to 15%, depending on the lender and their risk in lending the funds. Meanwhile, points may range between 2% and 4% of total loan amount. Based on loan to value ratios, the interest rates and points can greatly vary.

Loan to Value Ratio of Hard Money Loans

For a hard money lender to determine the amount they are able to lend, they use a ratio of loan amount, which is divided by property value. Thus, the term loan to value (LTV). It is common for many hard money lenders to offer between 65% and 75% of the current property value. However, there are some lenders willing to lend based on the after repair value (ARV), where by estimating property value after improvements are made. From the perspective of hard money lenders, this increases the risk as the amount of capital the lender puts in, will decrease the capital investment of the borrower. Because of the higher risk involved, hard money lenders will have a higher interest rate.

Also, some hard money lenders are willing to lend a higher percentage of the after repair value, or finance the cost of rehab. From the borrower’s perspective, this may sound great, but due to the higher risk involved, they have a much higher interest rate and points. For this type of loan, you can expect an interest rate between 15% and 18% and 5 to 6 points when lenders fun a loan with a small to no down payment from borrowers. Although, there are situations where it will be worthwhile for a borrower to pay the exorbitant rates to secure deals if they are able to generate a profit on the project.

Hard Money Loan Borrower Requirements

As previously discussed, the main concern of hard money lenders is the equity amount a borrower invests within a property being used as collateral. The credit rating of a borrower and credit problems such as foreclosures or short sales can be over-looked by hard money lenders, long as the borrower has enough capital to pay the loans interest.

In addition, hard money lenders have to take the borrowers plan of the property into consideration. Borrowers have to present reasonable plans showcasing their overall plan for the property, and how the intend to pay the loan off. Generally, this includes making improvements on the property, then reselling it, or obtaining a long-term financing option later.

Locating Hard Money Lenders

There are various ways that you can go about locating a reputable hard money lender in your area. An easy method for finding a local hard money lender is using Google to search for the following: [your area] and “hard money lenders”.  The search results will provide individual companies, along with a list of various hard money lenders that others have complied. This provides many lenders to start contacting, then evaluate the ones of interest.

In addition, you can locate hard money lenders by attending a local real estate investor club meeting. Most cities have these club meetings, and hard money lenders tend to attend in search of networking with potential borrowers. However, if there are no hard money lenders at the meeting you may ask other real estate investors if they can recommend a hard money lender. You may find that conventional mortgage brokers, real estate brokers, or other real estate professionals can refer experienced hard money lenders. You can see which hard money lenders are most recommended by leveraging your current network.

Hard Money Loans in Arizona

In Arizona the most experienced and trusted hard money lender is Brad Loans by eMortgage.  For over 40 years our real estate and hard money lending experience has made us the expert in the Phoenix Valley.  We fund both owner occupant hard money loans and real estate investment loans that are common for fix and flip projects.  Our team can help you purchase a property or refinance a property you already have purchased.  Borrowers with no credit or bad credit are accepted and we can loan up to 100% loan to value with cross collateral. If you are in Arizona and are looking for a hard money loan to purchase a property, look no further than Brad Loans.  To apply for a hard money loan please fill out our loan application form.

For more information please call 480-948-0880.

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