Consistently and accurately vetting fix and flip loan applicants is an essential facet of every successful real estate lending practice—but the process can be deceivingly nuanced and challenging particularly when you factor in a constantly fluctuating market and highly variable economic conditions. Still, when it comes to the underwriting process, there are a few tried-and-true indicators to pay extra attention to when determining the viability of a potential client’s proposed rehab project. The following is a quick rundown of the main aspects of an investor’s fix and flip property to streamline your evaluation process and minimize the risk of default in the future.
Where the subject property is located is a key factor in the fix and flip assessment analysis. Based on your geographical location, there may be certain applicable state regulations that can impact the loan type, interest rates, fees, points, loan to value ratio, loan length and prepayment penalties that a lender is able to offer to potential borrowers. Make sure that you are up to speed on these governmental mandates to avoid any negative regulatory repercussions down the road. Additionally, you will want to be intimately familiar with the characteristics of the various neighborhoods that comprise your collective operational radius. What districts or general areas have high crime rates or are predominately rural in nature where population size may influence the potential resale timeline of the rehabbed property? What localities are up-and-coming with plenty of new developments and amenities that will attract potential homebuyers? Asking yourself these kinds of questions as you work your way through an investor’s loan application will help you in forming a more informed estimation of the project’s chances of return on investment capability and ultimately help you make the decision as to whether you feel comfortable financing the project.
One of the first data points you will want to establish is the current valuation of the property that is provided from a reliable source. This will provide you with a frame of reference when discussing the investor’s estimated cost of the rehabilitation process they want to undertake and the price they plan on re-selling the property for—also referred to as the after-repair-value (ARV). Using these numbers, you will get a better picture of the overall project budget and how much leeway you have built into the finances to account for any unforeseen issues. While investors will typically present you with all of this information up front, be sure to fact-check their estimations using neighborhood comps and your overall knowledge of the property’s condition and construction costs on similar projects you may have financed in the past before approving the loan package.
If you are dealing with a sophisticated real estate investor with an established track record of success when it comes to fixing up and reselling properties for a profit, you may feel a little more comfortable on giving them some leeway when it comes to negotiating the loan-to-value (LTV) ratio required to secure financing. On the other end of the spectrum, you may find it beneficial to require an optimal LTV ratio for new or relatively inexperienced flippers who may lack the know-how when it comes to the house flipping industry and how to avoid common mistakes that could spell trouble for you as the funding entity of the project. Investors who have operated in the area for a considerable amount of time and that have a diversified portfolio of projects generally carry a significantly lower risk profile from a lender’s perspective when it comes to avoiding default or credit issues.
If you are looking for a hard money lender to partner with on your next fix and flip loan, Alpha Funding Partners offers the best combination of rates and leverage. We pride ourselves in our fast turnaround times, quicker closings, customer service, and our experience in the industry. Reach out to Alpha Funding Partners today to learn more about obtaining a hard money loan for your next fix and flip project.