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What are Fix-and-Flip loans?

Fix-and-Flip loans refer to short-term loans which are used by ‘Flippers’ or real estate investors who buy a property, improve or renovate it and sell it for a higher price to other buyers for earning profit. Fix-and-Flip loans are specifically used for residential real estate investment, that is investment in homes and not office buildings or schools.

After buying a property at a foreclosure or an auction, a real estate investor might choose to sell the property as-it-is to the next buyer or choose to upscale it before selling to be able to charge a higher rate. This is where the investor requires a Fix-and-Flip loan which can cover the cost of refurbishing the property. A Fix-and-Flip loan is a short-term loan and thus extends up to a period of 12 to 18 months.

What can a Fix-and-Flip Loan be used for?

The investors can use Fix-and-Flip loans for doing the following tasks:

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  • Purchasing a property: Investors can take these loans for the purchase of a property that they intend to sell in the short-term.
  • Renovation or rehabilitation of a property: The loan is primarily taken for flipping properties. This includes fixing faults in the house, painting the interior and exterior, placing tiles where needed, installing new chimneys, kitchen cabinets, furniture, and other equipment to provide better facilities.
  • Construction of a new house: You can take this loan to build a new home on an empty plot bought to sell the plot in the near future.

Why Real Estate Investors & Lenders Prefer Fix-and-Flip Loans?

Real estate investors who deal in flipping and upselling houses prefer Fix-and-Flip loans to traditional bank loans due to the following reasons:

  • It is less risky: Fix-and-Flip loans are comparatively less risky than other types of personal loans because, in personal loans, a person’s own property is a collateral and thus at risk in case of a default. But, in Fix-and-Flip loans, the plot, which is meant to be renovated, is the collateral. This reduces the risk of personal loss in case of loan default.
  • More accessible than traditional loans: Taking a Fix-and-Flip loan is a flexible option; they do not include a rigid procedure like that required to obtain a conventional bank loan. Some borrowers who cannot avail traditional bank loans can still get the benefit of a Fix-and-Flip loan.
  • Quicker funding than traditional home loans: Real estate investors who buy properties from foreclosures and auctions need quick money in hand. This is so that they can purchase the properties at once. For this, Fix-and-Flip loans prove beneficial as they are delivered faster than a traditional home loan, which goes through a time-consuming process before the loan can be availed.
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Fix-and-Flip loans are not just beneficial to the real estate investors but also to the lenders. It benefits them in the following ways:

  • They are short-term: Fix-and-Flip loans are short-term loans for 12 to 18 months. Thus, they can almost guarantee the lenders to benefit from their investment within a short period of a year or two.
  • Secured collateral: If the borrower is unable to pay back the loan, then the lender can seize the plot for which the loan was taken. He could then sell this land to compensate the cost of lending or be further renovated by the lender himself and be sold for higher prices.

How Do They Work?

Following are the ways you can go about getting a Fix-and-Flip loan as a real estate investor:

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Getting Loans from Private Lenders:

These are individual people with enough wealth to lend money. They are often willing to provide loans to make an investment and monetary increment. They are similar to hard money lenders but have more relaxed terms and conditions of the loan. Their offers are negotiable and thus flexible. They can put up offers like splitting the profit instead of charging a rate of interest.

Getting Loans from Online Private Lenders:

Online private lenders are another great option for finding Fix-and-Flip loans at minimal interest rates. They are quick, easily accessible, do not require a lot of paperwork and versatile as per the real estate investor’s requirements.

One such trusted online lender service is Venus Capital. It is faster, easier and requires only 10% down for experienced investors. It provides loans of $150,000 up to $2,000,000.

Getting Loans from Family or Friends:

You can also try to get a loan from a near relative or friend who is willing to invest in your Fix-and-Flip project. In these cases, the interest rates and terms of contract can be negotiated accordingly.

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Getting Loans from a Partner:

If you are a real estate investor with a more experienced partner or someone who is well off in terms of money, then the partner could invest in payment of the plot and cost of renovation at a lower interest rate. In turn, you can look after the management of resources for the project.

Getting Loans via Crowdfunding:

Crowdfunding refers to a way of giving loan in which various parties (including individuals and firms) pool in to provide loan for a particular cause. Each investor supplies a percentage of money for the loan and gets interest on that percent.

Though not all crowdfunding sites are suitable for funding a Fix-and-Flip project, there are some crowdfunding websites that are tailored specially for funding Fix-and-Flip loans.

In conclusion, Fix-and-Flip loans are helpful to real estate investors looking to upsell a residential site. They are not as formal or procedural as a traditional bank loan; this allows for quicker and negotiable loan options. Thus, they are beneficial to both the borrower and the lender. You can choose from the options according to your requirements.