Investor Fix And Flip Renovation Loans – How Do They Work?

Investors looking to buy rundown homes, fix them, and sell them for a profit have their pick of homes today with higher foreclosure rates and home prices.

But how do you make it happen if you don't have the cash to buy and renovate the home?

If you own a property, you may tap into the equity with a home equity loan or cash-out refinance. But if you don't want to use your home's equity, investor fix and flip renovation loans may be just what you need.

What is a Fix and Flip Loan?

Fix, and flip loans have two parts - the purchase and the renovations. You might hear them called bridge loans or rehab loans too. They are meant for homes you buy and flip quickly - usually 12 - 18 months.

Here are their two parts.

Purchase Loan

The purchase part of the loan works like most other loans. You negotiate a sales price, sign a contract, and provide it to the lender.

You'll also supply your income, asset, and credit documentation to prove you can afford the loan. The purchase part of the loan is based on the purchase price. The seller receives the agreed-upon amount at the closing, and all other interested parties are paid from the closing costs.

Rehab Loan

The rehab part of the loan covers renovating costs so that you can sell it for a profit. The money left after paying the seller and all other parties sits in an escrow account. Then, lenders or the escrow company disburse the funds as agreed in the rehab agreement.

The funds help cover the cost of labor and materials. Some projects require an initial disbursement to buy materials and begin the project. The remaining funds get distributed according to the distribution schedule and work progress.

Benefits of Fix and Flip Loans

Fix and flip loans offer investors many advantages, including the following:

• Fast financing
Real estate transactions can go fast. If you aren't ready with financing instantly, you could lose the deal to a cash buyer. Bridge loan financing closes quickly, giving you the capital
needed to buy the property.

• Interest-only payments
At the start of the loan, you only need to make interest payments. This frees up your capital, giving you enough cash flow to renovate the home quickly.

• Underwriting based on the after-repaired value
When determining your loan amount, the underwriter considers the home's after-repaired value. This is the value your home should have after all intended repairs, which allows you a
higher loan amount to cover all costs.

Final Thoughts

If you're thinking about buying fix-and-flip homes, rehab loans can be the answer to your financing needs. You'll get money to buy and fix the house, and if you sell the property within 12 - 18 months, you pay off the loan quickly, paying minimal interest, and walk away with the remaining proceeds from the sale.