funding for real estate flips

Options: Funding for Real Estate Flips

Off-marketing listings for buyers may not always be an advantage, simply because sometimes a hidden listing creates an allure that leads to a bidding war, perhaps at an auction. However, as a first-time investor in this type of property, it’s important to be fully prepared in terms of funding for real estate flips ahead of time, so you have a better chance at securing a property you want most. As a buyer, purchasing off-marketing listings allows you access to inventory that your competition isn’t seeing. If you’re buying in a hot market, pocket listings may be the only way to purchase a home too.

Today, more so than ever before, it’s easy to locate these off-market listings. Become friends with local real estate agents as they are often the only ones that know about these secret listings. Ultimately, finding a pocket listing is half the battle, but seeing a deal go through is the main goal. This is why buyers of off-market listings need to know everything regarding the funding for real estate flips process of this type of listing. This helps the experience to be a success. Generally, the real estate agent is representing both you and the seller this is known as a dual agency sale. While this is perfectly legal, it can be hard for you to tell if the agent themselves has their best interests in mind or not. This is because the higher the sale price, the higher their commission is. If you’re buying in a market that has little inventory, this may not even matter. However, it is important to be aware of conflicts of interest.

Securing Financing

When it comes to these types of listings, you’re important to have ready money available. Oftentimes HELOC and hard money lending are two of the best options to achieve this level of fluid financing.

Hard Money Loans

According to Investopedia, a hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by actual real property. These loans are typically issued by private investors or companies. These types of loans typically carry higher interest rates than conventional residential or commercial property loans. This is because they are a shorter duration and come with a higher risk too. Most of these loans are used for projects that will last a few months to a few years only.

Similar to that of a bridge loan, which has similar criteria, the loan amount that a lender is able to give is determined by a simple equation known as the loan to value (LTV): the ratio of loan amount divided by the value of property (Investopedia). Typically, a lender will lend anywhere from 65-75% of the current value of the property. According to Trulia, the value of the property is determined through a BPO or broker price opinion, or an appraisal done by a licensed appraiser in the state in which the property is located.

Getting Approved

Lenders are interested in available income and your credit score. If you have a solid history of borrowing responsibly and can show that you have the ability to repay this loan in good faith, you’ll be approved. Hard money agreements are also more flexible than traditional loan agreements as they don’t use a standardized underwriting process. Instead, each applicant and/or deal is evaluated individually. Depending on the situation, repayment schedules can be tweak according to your needs, so be open.

Ultimately, the best way to be ahead of the game, is to get connected with investors. By developing and honing in on these relationships, it will make it easily for you to fund projects quicker in the future. Being prepared is key when it comes to financing off-market listings that are time sensitive.

HELOC Loans

Another popular financing option for off-marketing listings is known as HELOC. HELOC or home equity line of credit or home equity line, is a loan that is set up as a line of credit for a maximum draw rather than just a fixed dollar amount (NerdWallet). Unlike a standard mortgage, a lender will promise to advance you a specific amount, for instance up to $250,000 in an amount and at a time of your choosing. This allows you to have cash on hand and ready for an auction. Draw periods are usually five to 10 years, during which you will pay interest. Repayment periods are usually 10 to 20 years (but can vary).

HELOC loans are great for those needing access to a reserve of cash over a period of time i.e. you! According to myfico.com, these adjustable loans allow your monthly payments to change with the market. You will pay interest only for an initial period, which will lower your monthly payments until you’re ready to pay the principal itself. This interest is also generally tax deductible for loans up to $100,000. Because the balance of a HELOC changes daily, interest is also calculated daily rather than monthly too.

Ultimately, HELOCs are great for those funding intermittent needs as you draw and pay interest on only what you actually need. This is especially great for an auction as you have a specific amount available, but may not need the entire amount you’re able to draw. This is a very convenient way to approach off-marketing listings and financing them.

According to NerdWallet.com, there are some advantages to home equity lines of credit, they include:

  • The ability to pay interest compounded only on the amount you draw, not the total equity available
  • Interest is usually tax deductible, up to $100,000.
  • Flexible interest-only payments during the actual draw period making it easier to finance for first-time investors with less available cash.

Ultimately, as a first-time investor, it’s important to secure funding for real estate flips and have open relationships with real estate agents. By knowing about these off-market listings first and having the financing options available to have cash ready and available, you will be the most successful

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Tony Stern

Born and educated in the UK, Tony began his real estate career in 1976. By 1982 Tony launched a real estate development firm. In the 1990’s he created, acquired & sold several companies including Star Refining an international precious metal refining company with offices around the world. Since 2001 Tony has been investing in all aspects of real estate, concentrating on the Florida foreclosure market. Seeing a need to help investors, in 2016 Tony co-founded, PropertyOnion.com.

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