Are you considering diving into the world of real estate investment, particularly fix-and-flip properties? Understanding the intricacies of financing is crucial for success in this venture. Let’s break down the essentials of bridge loans and fix-and-flip financing, shedding light on key terms and steps involved in the process.

Key Definitions:

ARV (After Repair Value):

The ARV represents the estimated value of a property after renovations have been completed. This figure is crucial for investors as it determines the potential resale value or refinancing opportunities. An accurate ARV assessment helps investors gauge potential profits and make informed decisions regarding their investment strategy.

As-Is-Value:

The As-Is-Value denotes the current value of a property in its present condition, without any renovations or improvements. Understanding the As-Is-Value provides investors with a baseline for assessing the property’s investment potential and determining the scope of renovations needed to enhance its value.

Renovation Budget / Draw Schedule:

The Renovation Budget, accompanied by a Draw Schedule, outlines the planned renovations and associated costs. This detailed plan is essential for comparing contractor bids, managing expenses, and ensuring that renovation funds are disbursed efficiently. The Draw Schedule facilitates periodic reimbursements for completed work, streamlining the renovation process and optimizing project management.

Change Orders:

Change Orders refer to additional costs or modifications that arise during the renovation process. These changes may include unforeseen repairs, upgrades, or alterations to the original renovation plan. Properly managing Change Orders is vital for budgetary control and ensuring that renovations stay within the planned scope and budget.

Loan-to-Cost (LTC):

The Loan-to-Cost ratio represents the proportion of the loan amount to the total cost of property acquisition. This term can also include renovation costs. This metric helps lenders assess the level of risk associated with financing a particular project and determines the maximum loan amount available to the borrower based on their investment costs.

Combined Loan-to-Value (CLTV):

The Combined Loan-to-Value ratio compares the total loan amount (including both the purchase loan and renovation loan) to the property’s ARV. This ratio provides lenders with an indication of the property’s overall financing structure and risk exposure, influencing loan terms and eligibility criteria.

Wholesaler:

A Wholesaler is an intermediary who specializes in finding motivated sellers and connecting them with investors. These individuals facilitate property transactions by sourcing off-market deals and negotiating favorable terms on behalf of investors. Wholesalers typically earn a fee, known as an assignment fee, for their services.

Letter of Intent to Lend (LOI):

A Letter of Intent to Lend serves as a preliminary agreement outlining the terms and conditions of a potential loan. This document provides a framework for further for the loan and can be presented as a pre-qualification. It establishes mutual understanding and expectations before formalizing the lending arrangement.

Points:

Points are upfront fees charged by lenders to borrowers in exchange for providing a loan. These fees are typically expressed as a percentage of the loan amount and are paid at the time of closing. Points serve as a source of revenue for lenders and may vary depending on the terms of the loan and the borrower’s creditworthiness.

Pre-payment Penalties (PPP):

Pre-payment Penalties are fees charged to borrowers for paying off a loan before the specified term expires. These penalties discourage early loan repayment and compensate lenders for potential losses associated with premature loan closure. Borrowers should carefully review the terms of their loan agreement to understand the duration and conditions of any pre-payment penalties.

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Steps to Acquiring a Fix-and-Flip Property:

Connect with a Specialized Lender:

• Before diving into the world of fix-and-flip properties, it’s crucial to establish a relationship with a lender specializing in residential investment properties. Not all lenders are created equal, and not all of them work with non-QM banks or hedge funds that cater to these types of deals.
• Depending on your lender, you’ll typically need a down payment ranging from 10 to 25% or more of the property’s purchase price.
• Additionally, you’ll need to account for closing costs, which can vary from state to state. Your lender will guide you through these financial aspects and help determine the properties you can afford based on your savings.
• Most fix-and-flip loans are interest-only, but it’s essential to confirm this with your lender.
• Pay attention to the loan terms, including the duration (6 months, 12 months, 18 months, or longer), interest rate, and any points, appraisal fees, or other associated costs. Familiarize yourself with the lender’s process to ensure a smooth transaction.

Identify Your Market:

• Depending on your investment strategy and available capital, your target market may not necessarily be your local area. However, starting close to home offers the advantage of easier project oversight. Research various markets to identify areas with promising investment potential. Consider factors such as market trends, property values, and demand for renovated homes or rentals.

Engage with Real Estate Professionals:

• To navigate the fix-and-flip market effectively, it’s beneficial to work with real estate professionals experienced in investment properties. Seek out realtors who specialize in investment properties and join local Facebook groups or MeetUps. These groups are great for networking and connecting with wholesalers.
• A knowledgeable realtor can assist you in assessing properties’ as-is value and ARV, providing invaluable insights into potential investment opportunities.

Analyze Deals and Negotiate:

• As you start evaluating potential properties, be prepared to review numerous deals and hone your negotiation skills. Remember, it’s essential to approach negotiations pragmatically and not hesitate to make offers that align with your investment goals. While rejection is inevitable, each no brings you closer to a yes. Calculate your numbers diligently, considering renovation costs, potential profits, and your risk tolerance level.

Build Relationships with Contractors:

• Renovating fix-and-flip properties requires a reliable team of contractors or handymen. Even if you’re not particularly handy yourself, fostering strong relationships with skilled professionals is essential. Consider taking contractors or handymen with you to inspect properties, allowing them to provide valuable input on renovation costs and requirements. Keep detailed notes and ask questions to ensure clarity throughout the renovation process.

Note: The more properties you assess, the better you’ll become at estimating renovation costs. Providing comparable property data to your contractors beforehand helps align renovation goals and expectations.

Coordinate with Your Lender:

• Once you’ve identified a property that aligns with your investment goals, reconnect with your lender to initiate the financing process.
• If you’re working with me, I’ll provide a comprehensive questionnaire to gather all the necessary information for pricing the loan with various hedge funds and private lenders.
• Upon receiving lender responses, we’ll discuss the terms to ensure mutual understanding.
• I’ll then prepare a Letter of Intent to Lend (LOI) to present with your offer, and I’ll also reach out to relevant parties, such as sellers, wholesalers, and listing agents, to discuss your qualifications and the lending process.

Secure the Property:

• When your offer is accepted, it’s time to celebrate going under contract! This phase involves several critical steps, including forming an LLC (if necessary), confirming the construction budget and draw schedule with your selected contractor, securing builder’s risk insurance, and working with the title company to verify property ownership and rights. Depending on your lender’s requirements, you may need to arrange for an appraisal or inspection to finalize the loan terms.

Close on the Property and Commence Renovation:

With all the necessary preparations in place, it’s time to close on the property and kickstart the renovation process. As you embark on this exciting journey, remember to stay organized, communicate effectively with your team, and remain flexible to adapt to any unexpected challenges that may arise.

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Understanding the Math:

Every lender and bank/fund has slightly different terms and are subject to change. Here is the math based on a fund I am working with monthly as of February 2024. Normally, these loans are structured with 12-month terms and carry three months of pre-payment penalties. This means the borrowers must make at least three months of interest payments.

Down Payment Calculation:

• Multiply the purchase price by 10% to determine your required down payment.
  • Purchase Price * .10 = Down Payment
• The remaining 90% of the purchase price constitutes your initial loan amount.
  • Purchase Price * .90 = Initial Loan Amount

Combined Loan-to-Value (CLTV) Calculation:

• Multiply the After Repair Value (ARV) of the property by 70% to find the Combined Loan-to-Value (CLTV).
  • ARV * .70 = CLTV
• Subtract the initial loan amount from the CLTV to ascertain the maximum renovation budget allowable for the property.
  • CLTV – Initial Loan Amount = Max Renovation Budget

Total Loan and Loan Cost Calculation:

• Add the initial loan amount to the renovation budget to find the total loan amount.
  • Initial Loan Amount + Renovation Budget = Total Loan Amount
• Multiply the total loan amount by the points percentage to calculate the associated loan costs.
  • Total Loan Amount * Points = Loan Cost

Total Funds Needed to Close:

To determine the total funds required to close the transaction, add together the down payment, loan costs, and closing costs.

Moreover, this fund offers a unique feature! They only charge interest when funds are withdrawn from the draw account for renovations. Consequently, your monthly payment will fluctuate as you progress through the renovation process. You can calculate the annual interest paid by multiplying the initial loan amount by the interest rate. Then, divide the annual interest by 12 to derive the monthly payment. This method provides insight into the maximum payment amount that could occur over the loan’s term.

By mastering these fundamentals of bridge loans and fix-and-flip financing, you’re equipping yourself to navigate the complexities of real estate investment with confidence. Remember, thorough research, strategic partnerships and diligent planning are key to achieving success in this dynamic market.

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About Me:

Hi Yall! I am Katherine, a seasoned real estate professional with a passion for guiding investors through the intricacies of property investment. With extensive experience in residential and commercial real estate, I am dedicated to helping individuals achieve their investment goals. Let’s embark on this journey together, turning your real estate dreams into tangible success stories.