Flipping houses is big business these days. Many people are trying to get into the business, but may or may not have a sound business model to work with.
One of the biggest stumbling blocks people have when getting started flipping houses is figuring out how to evaluate the property. There are a number of factors that go into this, and some of these factors we cannot address as they can be property specific, but what we can do is to give a general overview on a simple evaluation process when flipping houses.
At the root of flipping houses is your profit potential. This is the money you will make once the property has been rehabbed and sold. The biggest mistake I see new investors making is that they don’t give enough room for this profit margin. These margins cannot be incredibly thin, as if you have overruns, if you have to mark the property down to sell, have a longer holding period than anticipated, etc. you could end up working for no profit.
The rule of thumb I use is that you need to purchase the property for no more than 60-65% of what you intend to sell it for. If you are able to buy all cash, these could be a bit higher, but if you are using rehab loans, you must stay at or below this mark.
When looking at these ratios, it is important that you take into account the work to be done. If you are buying at 60-65% of the value, and are using private money for your loan, your rehab costs need to be evaluated as well. Your rehab cost plus your purchase price needs to be less than 70% of the after repair value on the home.
So, if you are buying a home for 60% of the after repair value, your cost of rehab can be a little higher than if you are paying 65%.
When calculating the after repair value, be sure you use closed sales from like properties. You don’t want to convince yourself that your deal is good, rather, be conservative and try to convince yourself the deal is not good. Being overly optimistic on your after repair value is a great way to set yourself up to lose.
If you are serious about flipping houses for a profit, do your homework. Surround yourself with quality professionals – an agent who knows how to work with bank owned properties, a quality contractor you can trust, and a solid finance person.
Check back in, we will continue posting more details to help you be successful when flipping houses!
Author: Admin
Hard Money
Hard money is fast becoming the avenue of choice for many real estate investors when looking for transactional funding. The red tape that the banks and other lending institutions put up when trying to qualify for a loan does not exist in the hard money world.
Hard money is a catch all phrase. Also referred to as private money, private hard money, gap financing, bridge financing and other terms, the essentials remain the same. These are loans that are being funded by an individual, or individuals, rather than by a large banking institution.
The up side of this basic fact about hard money is that the decision makers are the people lending the money themselves. There are no black and white guidelines or restrictions that every transaction must fall within. Instead, if the deal makes sense and the private money investor feels comfortable with the borrower and (more importantly) the collateral, a loan can typically be made.
In exchange for these loose guidelines, private investors command a higher interest rate than the banks typically will charge. Double digit rates are the norm, with typical hard money transactions falling out somewhere between 10% and 14%. The more conservative the deal is, the better your chances are of obtaining better terms. The more aggressive a deal is, the more you should expect to pay for the money.
In addition to interest rates, you can also expect the fees to be higher. Average cost on a hard money loan these days can range from 3 points on up. Seven and eight point deals are not out of the ordinary, especially for short term bridge financing that has become popular for “fix and flip” properties. These rehab loans are more aggressive, and hence more expensive.
Hard money these days also tends to shy away from owner occupied properties, or loans made for consumer purposes. With the recent melt down in the financial world, many new regulations have been placed on lending. Due to these regulations, many hard money lenders simply choose not to make consumer loans.
When looking for hard money, it is important to deal with a professional who specializes in this type of financing. Getting hard money financing is all about relationships, the more aggressive you need to be, the more important it is to have a professional with quality relationships working with you. For more information, or to talk with a specialist, please visit hard money loans.
Hard Money Rehab Loans
Hard money rehab loans are a great way for investors to leverage the cash they have available in today’s real estate market. Many investors, however, don’t know a lot about rehab loans, who to talk to and what to expect from a hard money loan in general. We’ll take a look at these types of loans in detail, and also point you in the direction of a great resource to help you find funding for these transactions.
A hard money rehab loan is a short term bridge loan made using an after repair value of a property. These loans are made by individual investors, so bank underwriting guidelines don’t apply. These loans are typically priced in the double digit interest rate range, and can cost up to 10 points. An average transaction may go out the door at 13% and 7 or 8 points, which is expensive even by hard money standards (but it is still much less expensive than a partner)!
When talking about hard money rehab loans, there are two factors that play into the added expense. Number one is the aggressive nature of the loan amount. These loans are typically placed using an after repair value. So this is a hypothetical future value, assuming all work is completed on budget as presented. Many times, the loan amount offered on these types of loans is equal to or greater than the purchase price! That is pretty aggressive, and hence bears a higher cost.
In addition, the nature of these loans is short term. These loans are usually written for anywhere from six months to a year. In addition, they are typically written with no prepayment penalty. Many of these rehab loans are paid off within 60-90 days. So the investor has just made a very aggressive loan, but only makes 2-3 months worth of interest on it. Due to this, these loans are typically cost heavy on the front end, to ensure a return on investment.
In addition, these loans have more moving parts than other hard money loans do. Typically they include a fund control account, so all the money needed to complete the rehab is disbursed as the work is being done. They will also have an interest reserve account which will make your monthly payments for a set amount of time.
To speak with a professional who specializes in these types of loans, visit this rehab loans page.
Hard Money Loan Terms – Points
Points is a term used in almost all hard money loan transactions. Points indicate the cost of a loan, and are a percentage of the loan amount. So a hard money loan with a cost of 5 points would be the same as saying the cost of the loan is 5% of the loan. It is similar to how real estate agents get paid, a percentage of the property sales price, but instead of ‘percentage’, hard money lenders refer to these fees as points.
Many borrowers are confused as to why they must pay points on hard money loans. Hard money lending is different than getting a loan from the bank. If you go directly to the bank, they make you the loan and the person who helps you is an employee of the bank. The bank pays them a salary. After the bank makes the loan they typically sell the loan (while some hold it for the interest return). When the loan is sold, the bank makes money on that sale depending on the rate and terms. For example, if a bank makes a loan of $100,000, they may sell it for $103,000. In this manner, everyone is being paid through the bank.
On hard money loans there is no bank involved. There is no person who is making a salary (generally speaking) helping you. Instead the broker or individual representing you is paid only on commission. In addition, the loan is not being sold but rather is being funded directly by an investor or group who intends to hold the loan to make a return on their money (the interest rate). So since the loan is not being sold, and the person helping is not being paid a commission, the borrower must be charged to pay these people so they can continue to stay in business.
In addition to paying the people involved in helping you, often times the end investor is also getting paid an upfront return in addition to the interest rate. This helps to guarantee a minimum return to the investor. Basically with hard money all of the fees pass through to the borrower, there are no yield spread premiums like there are for brokers who work with the banks (where the banks pay the brokers). While it may seem expensive, when you think about it the cost is less than a typical real estate commission people pay. Most real estate commissions seem to be about 6%. While some hard money loans cost 6 points or more (usually the more aggressive loans), many are actually less expensive with a cost of 4-5 points.
Hopefully this helps to explain not only what the term ‘points’ means, but also why they are charged on hard money loans.