Fix and Flip Funding

[Brandi Paul]

I get emails everyday advertising various Fix and Flip funding options. I am new to this type of financing and had a couple of questions. (I apologize in advance if these questions seem too basic).
Can these be used for flips when there are minimal repairs or upgrades needed to the property? Such as paint and carpet or perhaps replacing some fixtures.
It would appear as though the investor would still need to come in with cash down or is there a program that offers very little down payment?

Thank you-
Brandi

[Mitch Kronowit]

I talked to Craig and Diana at The Norris Group last week about their hard money loans (typically used for flipping). This is my understanding. They will finance 60% of the After Repair Value (ARV) and of that 60%, they will withhold a portion of the money for the repairs until you have them completed.

Here's an example of how it might work with a hypothetical property:

Appraised value (ARV): $100,000
Purchased from seller: $60,000
LTV: 60% (obviously)

But The Norris Group doesn't give you $60,000, they deduct 3.5 for points, loan fees, and withhold the money needed for repairs (let's say $10,000 in this case).

So, we have:

$60,000 (60% LTV)
-$2,100 points
-$2,000 (fees connected to the loan)
-$10,000 (hold for repairs)
======================
$45,900 proceeds from the loan

Then, assume about $4,000 in closing costs not connected to the loan.

So, you're going to need $18,100 at closing ($60,000-$45,900+$4,000)! You're also going to need money or credit to get the repairs complete so you can have your $10,000 back from withholding. That means you need access to almost $30,000 to purchase a house for $60,000! And what if you're off on that $10,000 for repairs and they run $15,000? What if the house only sells for $90,000? And I haven't even mentioned holding costs. As you can see, the potential profit begins to erode rather quickly and that's why so many flippers take it in the shorts if they're not careful. I'd like to see an REI Guru use my example above. :mrgreen:

Now, back to YOUR question. :wink:

Yes, if the repairs on minimal, you will have less money withheld from the loan and need less cash overall for closing and rehab. Just plug your estimated repair costs, however small, into the above example and you'll get an idea of what the cash requirements would be. Best of luck.