Flipping a house can be a lucrative investment strategy, but it requires a significant amount of capital upfront. This is where hard money lending comes in. Hard money loans are short-term, high-interest loans that are secured by the property being flipped. Here are the steps to successfully flip a house using hard money:
Step 1: Find a Property
The first step is to find a property that is suitable for flipping. Look for properties that are undervalued and in need of renovations. You can find these properties through real estate agents, online listings, or by driving around neighborhoods.
It's important to properly estimate rehab costs and after rehabbed value (ARV). I offer a free service for calculating ARV and if the property is located in LA, Orange or Riverside counties I can get you a bid to remodel your project.
Step 2: Get Pre-Approved for a Hard Money Loan
Before you make an offer on a property, you should get pre-approved for a hard money loan. This will give you an idea of how much you can borrow and what your interest rate will be. You can find hard money lenders through online directories or by asking for referrals from other real estate investors. It's important to pay close attention to the lenders underwriting requirements loan to purchase price (LTP), loan to cost (LTC), loan to value (LTV), loan to after rehabbed value (ARV) and % of rehab being financed. It is also important to find out the points being charged. Typically the higher the points the farther away from the actual lender your broker is. It is highly likely that your lending broker is asking another broker who may be asking another broker for funds. So a lot of mistakes can happen and fees are a lot higher. We also offer free loan preapprovals and loan estimates through our lending division.
Step 3: Make an Offer and Close the Deal
Once you find a property and get pre-approved for a loan, you can make an offer on the property. If your offer is accepted, you can close the deal and begin the renovation process. Obviously its never this easy. The lender will have to verify the ARV through their own methods....this can be an appraisal, a broker price opinion (BPO) or a desk appraisal. Its a good idea to also do plenty of inspections to make sure you don't miss anything major. Closing can sometimes be delayed by tenants not moving out, title issues, seller bankruptcy or foreclosure issues.
Step 4: Renovate the Property
The next step is to renovate the property. This may involve hiring contractors, obtaining permits, and purchasing materials. It’s important to have a detailed renovation plan and budget to ensure that you stay within your budget and timeline. This can be one of the most difficult parts of any project. It is extremely difficult to find a fast, cost effective, professional, great quality contractor to complete your projects. Even if you decide to do the renovations yourself you will probably still have issues with your labor and helpers.
Step 5: Sell the Property
Once the renovations are complete, it’s time to sell the property. You can list the property with a real estate agent or sell it yourself. It’s important to price the property appropriately to ensure a quick sale. Obviously having an excellent agent can help. I see so many times how investors try to sell themselves and they do not realize how much they lose in negotiations and by not going with an agent who has access to the MLS they lose countless offers. Even if the investor is an agent they have trouble separating their personal opinion from the negotiations. If you need help selling in California or Texas then please reach out and we can help or refer you to someone who can.
Step 6: Pay Back the Loan
After the property is sold, you will need to pay back the hard money loan. This will include the principal amount plus interest and fees. It’s important to have a plan in place to ensure that you can pay back the loan on time. In most cases you will have made interest only payments through out the loan process, so the balance at the end will be the same as in the beginning. One thing to also look out for...some lenders charge interest on the max amount of loan and others only charge for what you have used...so pay attention to the details.
Flipping a house using hard money can be a profitable investment strategy, but it’s important to do your research and have a solid plan in place. By following these steps, you can successfully flip a house using hard money. If you need any help on the real estate, lending, construction or partner side of flipping let us know we would be happy to help.
Dante Miller - Broker of FlipsterZ