In contrast to conventional lenders, which look mostly at a borrower’s income and credit score before deciding whether to approve a loan or not, Private Money/Hard Money Lenders typically base their final decision on the value of the Subject Property, which would be the collateral for a proposed loan.
Fix & Flip Loans contain “3” underlying Valuation Numbers:
- Value of the Subject Property when purchased
- Necessary Funds to make the Repairs & Improvements
- Final value following completion…..After Repaired Value (AVR)
Often the “Acquisition Price” paid by a buyer is lower than the Value of the Subject Property, and if so, then the Borrower would be “Credited” for the “Acquired Equity” in the Subject Property.
Whenever a lender is considering the possible MAX LTV financing limits, several factors are taken into account:
- The necessary amount of “Repairs & Improvement Funds”
- The “Additional Value” that will be obtained from the Repairs & Improvements
- The amount of “Repair & Improvement Funds” that the Borrower is able to invest
- The anticipated Finished Value, now known as After Repaired Value (ARV)
Once the above “Numbers” have been calculated, then a Lender can determine the MAX LTV loan that could be funded against the Subject Property.
Compared to other financing options, Hard Money Fix & Flip Loans have shorter repayment terms and higher interest rates, but they’re much easier to qualify for and obtain, and Private Money Lender will fund on properties that the Big Banks won’t.
It’s very important that when “Deciding & Calculating” the desired list of “Repairs & Improvements” to be made to the Subject Property that Costs and Incremental Value increase be carefully examined.
These are the “Cost Components” that always need to be made to the Subject Property, but still the costs to make such repairs must always be carefully calculated, since if MAJOR repairs need to be done that require a Building Permit, that Building & Safety Department could require that much more additional work be done than was anticipated.
This is often the case when Plumbing or Electrical repairs are made, and the possibility exists that complete upgrades be required to be made to the Subject Property to comply with current building codes.
It’s important to always visit the local Building & Safety Department to confirm if the “City” will require additional repairs that might substantially increase the repair budget.
Whenever the possibility exists to make Improvements that the following be carefully addressed:
- Costs to make the desired improvements
- Requirement of getting a Building Permit
- Estimated added value that the improvements will add to the Subject Property
Time is money, and if a Building Permit is required then the “City” could require Plans or Drawings be submitted relating to the desired improvements, this will add additional time and money to a Fix & Flip project, which could prove to be financially devastating.
Whenever calculating the estimated “Cost & Time” relating to a Fix & Flip project, its always best to assume that it will take longer than anticipated and cost more than budgeted.
If Repair & Improvements Funds are needed and the investment of such funds adds necessary value to the Subject Property, then a Fund Control Account might need to be set up with an outside Fund Control Company who will oversee the disbursement of the Repair & Improvements Funds.
The Fund Control Company will further make inspections of the Subject Property to confirm that the Repair & Improvements are being made and are in compliance with local Building & Safety requirements.
Unfortunately, many Lenders only take into consideration a home’s purchase price when determining to fund a Fix & Flip Loan, and oftentimes don’t look furth into the proposed loan.
We delve further into the deal to determine the final market value of the Subject Property on which to base the Fix & Flip Loans our company arranges.
In addition, we can provide the necessary funds to make needed repairs and upgrades and can also consider the property’s ARV (After Repaired Value) when determining our final Fix and Flip loan amount.
Our LTV’s reach as high as 70% or more when we’re considering funding Fix & Flip Loans, and If the house is purchased at a substantial discount from current market value, the need for borrower funds contribution can be greatly reduced.
If you need a Fix & Flip Loan and would like our company to investigate the merits of the transaction, please call one of our fix and flip loan consultants at (888) 797-7970, or you can complete the Short & Simple Loan Submission for a fast response. Hard Money Fix & Flip Loans.