Do traditional lenders finance fix and flips?

Question

I first started out thinking I would buy a few rental properties. However, whe more I think about it, dealing with a rental is a very long term play, and you're also dealing with a lot of unknowns.

I feel a fix and flip has a limited window. I think you're dealing with things you can more control, vs a rental property, you're dealing with things you can't really control (overall market appreciation). Would you agree?

My question is, if I pivot to doing flips instead of rentals, will traditional mortgage lenders finance a fix and flip?

Do you think doing a flip for someone like me who has a full time job (albeit in software engineering -- rest and vest ;)  is too aggressive?

Teri Feeney Styers · Answer

@Neil Hunter my local banker will fund a fix n flip. He requires 25% down (entire project - not just the purchase) and I do have to show ability to repay (dti ratio). The loan is for 6 months and they will decline some projects. I have a long term relationship with them, a good credit score, and more than one deposit account - and I'm a seasoned flipper - all of which help. @Christopher Brainard @Bob Okenwa

Craig Jeppesen · Answer

I flip houses and have a full time corporate office job. It is doable but is a lot of work. I spend most of my lunches at Lowe’s or Home Depot, sometimes work on the project in the am before work and on the weekends. I also get a lot of help from my brothers and subcontractors that I know. I try to do mostly cosmetic flips but they are hard to find. My current project I had to rip out most of the Sheetrock in the basement due to water damage, and move some electrical in the kitchen, and some new plumbing drains in the basement bath but the rest is cosmetic.

I was able to get traditional financing but had do do an escrowholdback for the water damage and tore up kitchen floor. As such , I had to tear out Sheetrock and install the kitchen floor first so the appraiser could come back and sign off on the work. I am not sure if lenders would do this for anyone, but I am able to with 20% down and cash for the Reno.

Carson Wilcox · Answer

Traditional lenders WILL finance  IF you personally can support the debt... AND the house is liveable for appraisal purposes.  which usually means hvac and at least passable living conditions.    It is limiting (this is what I do) to one deal at a time or whatever your income can cover...  They dont care if its a flip or not... just that you can afford it... and that the lenders will lend on it.  Many people buy one house before selling their current house..

Christopher Brainard · Answer

@Neil Hunter

Hi Neil and welcome to BP!

You are correct that flipping has less long term risk and macro economic uncertainty attached to it. Unless you take forever to complete the project, your exposure to the market cycle is very limited. As long as you buy right and fix it up properly, you should be able to dump the property, even if the economy takes a header. It does carry more micro risk than you may realize - most fix and flip properties are highly distressed which means deferred maintenance. They tend to have more hidden problems than buying rental properties off the MLS. Additionally, Fixing and Flipping is more of a job than an investment. It requires a lot more hands on time and a lot more knowledge about the construction process.

With that said, since you have a full time job, I wouldn't recommend it at this point in the market. The market itself is highly competitive and I'm not sure you'll have the time to devote to finding and managing the property. This can me mitigated if you can find a reliable general contractor, but I think there are more bad apples these days than good ones.

-Christopher

P.S. Almost forgot, a traditional lender isn't going to finance a fix and flip unless its purely cosmetic problems and you can personally support the debt. Pure cosmetic flips these days are a rare breed.

Bob Okenwa · Answer

Both have risks involving uncontrollable factors. With a fix-and-flip, you cannot control contractors or market conditions should they take a turn for the worse.

Conventional lenders probably will not finance a flip as there is too much risk involved on their end due to the higher likelihood of someone simply walking away from a bad deal and not repaying the loan, thereby forcing the bank to repossess the property, which banks are loathe to do.

Do traditional lenders finance fix and flips?

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