Purchasing real estate is an expensive investment, but it is almost always that: an investment.
Provided you do your homework and familiarize yourself with the local real estate market, you can pick up a property that needs a little work, update it, and flip it for a significant profit. However, there are a few things any real estate investor must know prior to picking up a property that’s priced low in hopes of selling it for a profit.
The market changes quickly, and comparisons are only good for a short amount of time. Flippers work fast to pick up homes, flip them, and get them back on the market before the market shifts and comps change.
Unfortunately, the lending process can take several months. If you’re looking to invest, you simply don’t have two to four months to wait for funding and closing on a mortgage to begin work on the property. You need to get started yesterday. But how do you do that without cash to buy a property right away?
You turn to a lender that offers fix and flip loans, which are also commonly referred to as hard money loans.
What is a hard money loan?
A hard money loan is one that comes with a long list of misconceptions. It’s commonly thought of as a loan available to anyone who doesn’t have a good credit score. While this is true to an extent, hard money loans are so much more than that.
In hard money loans, credit is not the primary way to guarantee you will pay the loan back. Instead the property itself is used as the collateral. This can provide a huge benefit to new investors who haven’t had time to build credit.
Investors use hard money loans to quickly purchase a property, fix it up, and flip it. The loan is not funded by a traditional lender, so there is no underwriting process.
Most loans of this nature are good for a year to five years, though most people need them only a few months.
How does a hard money loan work?
You want a loan, but you don’t have time to wait for an underwriter and the traditional process? You’ve found a home that’s in need of work, priced well below market value, and can sell for a substantial profit once it’s flipped? You have weeks to get this house on the market before comps have a chance to change, and you can’t wait for a loan? Hard money loans are great for instances like these.
A fix and flip loan helps you buy the property immediately. It’s not intended for rental properties or houses in which people already live, but it’s perfect for a property you need to buy quickly in order to ensure you can flip it for a profit.
The lender offers this loan to you based on collateral, which is the property you’re going to flip. Lenders don’t only consider your ability to repay. They also take into consideration how easily they could sell the collateral and profit from it.
It’s also a short-term loan as it’s meant to flip a property and sell it fast. Many hard money loans have terms around 12 month, with options for longer or shorter terms. Instead of consistently paying off the balance over the course of 12-months, arrangements are often made where the investor only pays interest. Then at the end of the loan period, the investor pays off the entire loan balance, presumably from the sale of the property.
The Benefits of Hard Money Loans
Hard money loans are remarkable in the investment industry. You get to pick up a loan in a matter of days rather than months. Speed is imperative when you’re looking to flip a home in a hot market. The comps are high and the price is low, which means other investors and potential buyers are trying to pick up the same property. You don’t have months to wait if there is a buyer with cash on hand.
Approval is also simple with a hard money loan. Unlike a traditional loans, you may not have to do a credit check. All that matters is you can repay the loan with the property. If the lender can take the property from you and sell it for a hot price, the lender is going to give you the loan with fewer credit checks and financial restrictions.
Most lenders will ask about your financial situation and require some information from you, but past credit problems such as foreclosures aren’t a problem for most hard money lenders.
Flexibility is another benefit of a hard money loan. It’s a friendlier process, and it’s one borrowers can easily work to their own financial advantage.
Is this the right loan for me?
If you are looking for a home to buy, fix, and live in, the answer is no. A hard money loan is not for you. A hard money loan is right for people who want to fix a property and sell it quickly to make a large profit. It’s the way many people get started in the real estate investment business, and it’s one that might allow you the opportunity to live a life of financial freedom before much longer.
Contact Orchard Funding Today
If you’re in the market for a hard money loan or a fix and flip loan for a property you’re buying, fixing, and selling, hard money loans could be a great fit for you. It’s fast, it’s easy, and it helps you get started making a large profit right away.
You don’t have time to waste looking for a traditional loan and awaiting the approval and underwriting process. Timing means everything when negotiating so call Orchard Funding at (310) 356-7373 today.