Fix and flip funding is used for residential properties that you are looking to buy, rehab and then sell or rent out in a short time frame (typically within 12 months). You might invest in a property in need of repairs or renovations, and then upgrade it to make it more appealing on the market. Traditional loans may not be appropriate for these scenarios since they have more stringent requirements for credit and financial histories. Moreover, because they need to be approved through large institutions, there may be little room for negotiation. There is also the time factor: the underwriter may require a large list of documents and take anywhere between 60 and 120 days to approve the deal. This can be a real issue because, in the fix-and-flip context, speed is crucial. You need to grab a viable property when it’s fresh on the market, and before a competitor gets there.
BENEFITS OF FIX AND FLIP LOANS
The major advantage of Park Rock Capital’s fix and flip loans is the speed and ease with which they can be accessed, along with the customization to meet an investor’s needs. Unlike a large bank or traditional lender, we can assess the particular deal for its commercial potential rather than personal credit history, looking at such factors as the Loan-to-Value ratio, Debt Service Coverage Ratio, and the experience of the investor. And unlike large lending institutions, we are able to quickly approve bridge loans to meet the needs of the project: up to 100% of the rehab costs and 90% of the purchase price. This allows you, the investor, to move quickly with the necessary capital for success. First-time investors are also welcomed with a 500K borrowing limit.
It’s vital, however, for inexperienced investors understand that fix and flipping isn’t easy money. It’s an accessible opportunity with a significant upside. However, it requires diligence, focus, planning, and plenty of research. Luckily, our guide will provide you with the keys for success.
HOW TO GET STARTED FIXING AND FLIPPING
Step 1: Scouting
Check out the neighborhood you want to invest in. Investigate the values of local properties, check out houses comparable to the ones you are considering, and look at trends over time (Zillow.com is a good resource for this). When choosing an area and a house, investigate both negative factors (highways, landfills, train stations) and positive factors (stores, restaurants, coffee shops and schools).
Because you are looking for properties that will gain in price over 6-12 months, you should keep an eye out for new developments that may affect property values. Skim through local newspapers and blogs—restaurant openings, luxury condo developments, or school improvements might all contribute to an increase, while unsightly developments planned, retail stores headed for bankruptcy, or schools headed towards failure might spell trouble.
You should familiarize yourself with any issues your buyers are likely to care about. If you are in the type of neighborhood where parents want to move, you should know the ins and outs of the local schools, including which ones would be most suitable for the family you would sell to. Is there reliable public transportation to and from the neighborhood? If not, what is the parking situation near the property you are considering? How is the traffic in the area? Are there any questions about the water supply or the power grid (water contaminants, frequent outages?) Exposure to natural disasters, like flooding? Make sure to do thorough due diligence well before you buy so you don’t run into surprises when you are trying to sell.
Equally important are the qualities of the house itself. Ideally it will be comparable to the existing properties on the market in the area in terms of square footage and price. Too far above the market and you might have trouble finding a buyer who can afford it—but too far below in terms of size or amenities and area buyers may be skeptical. You also want to make sure that adequate rehab is possible, and that you are equipped to take it on. If it has major structural problems, this may prove too much to handle unless you have expert construction experience.
Once you’ve thoroughly checked out the neighborhood and your target house, you’re ready to go!
Step 2- Renovate
Congratulations! You’ve chosen your house, purchased it, and are ready to begin “fixing”. Here are a few things to keep in mind. First of all, you don’t want to waste money by going above and beyond in your renovation process. If you upgrade the house excessively, it will become too expensive for your target market. You want to bring it up to the standard of the neighborhood, and maybe a little bit higher—but no more than that. You also want to get the most return for your investment, so you should focus on renovations that add the most to the value for the least expense. These tend to be highly visible parts of the house that buyers care about. For instance, a fresh coat of paint in a compelling but neutral color (never use bright or shocking colors), outdoor lighting, a garden full of flowers, and a new and attractive mailbox can go a long way towards making a great impression for relatively little cost.
Although sometimes a bit pricier, improvements to the kitchen such as a state-of-the-art stove, elegant counter-tops, and finished cabinets will make a huge difference in the resale value and are worth investing in. Modern toilets, sink fixtures, new bathroom tile, and powerful showers also fall into this category. Things to avoid sinking money into include home offices, athletic equipment, pools or hot tubs, or outdoor cooking facilities like grills. Let your buyers install these optional amenities themselves, if they want them; you don’t know which they will need, so these kinds of improvements can drain your budget and limit your selling options later.
An example of a judgment call you might have to make is whether to renovate the basement. A finished basement can be appealing for a variety of reasons. It can make the house feel larger and more luxurious, while opening up to the buyer many possibilities for use, including an entertainment den, guest room, or wine cellar. However, its added value to the property can be limited: usually a basement is appraised at half the value per square foot compared to the above-ground parts of the house. Additionally, basement renovations can pose unforeseen challenges such as water damage, unstable terrain, local laws preventing certain types of development, or difficulty installing electrical and heating systems.
Basements are not for the casual newcomer. They can make a strong statement but require especially thorough research in advance to make sure they are worth it and won’t throw a huge wrench in the works.
The bottom line is: make sure that you’re in a good location, that you understand the neighborhood and its needs, that there are no hidden surprises in the property, and that you are carefully controlling your rehab costs and focusing on renovations that add value. You’ll master the art of fixing and flipping in no time.