June 6, 2022

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How to Find Fix and Flips?

How to Find Fix and Flips?

If you’ve watched any HGTV lately, you’ve probably heard the term fix and flip more than a few times. Watching people purchase, improve, and then sell homes has become a pastime for many Americans. And for good reason: fixing and flipping is a great way for a new real estate investor to grow their cash position quickly. Holding onto an investment like an apartment building or retail location can take a long time to pay off. Fix and flips can generate cash much faster. This lower barrier to entry is attractive to many investors as they start their careers in real estate. But how do you find the right house to flip? And once you’ve found it, how do you purchase it, fix it up, and sell it? What is a Fix and Flip? A fix and flip is the process where an investor buys a property, fixes it up, and then sells it at a profit. This strategy has been popular for many years, especially in years when the housing market offered low property sale prices.  The principle is pretty simple: Find a home that needs some work, do the work that needs to be done to increase the value, and sell it for a much higher price than you bought it for. This is pretty simple to understand, but the execution requires a complete understanding of the process, especially how to find houses that are good fix and flip candidates.  Why Fix and Flip? When done correctly, a fix and flip can result in large financial gains. For example, let’s say you purchase a property for $200,000 and make renovations that cost you $50,000. If your cost to sell (real estate agent commissions and closing costs) is $30,000 and you sell it at a price of $350,000 that’s a profit of $70,000. Not bad for 6 or so months of work.   Beyond the financial gains, many people enjoy the process of fixing and flipping as well. Searching for that “diamond in the rough” and turning it into one of the nicer homes in the neighborhood can be very rewarding.  How to Fix and Flip? Start by creating a fix and flip business plan. This includes analyzing the market where you are looking at property, creating a timeline for the flip, crunching the numbers to create a financial plan, securing financing, and trying to foresee any obstacles that might arise.  Learning how to fix and flip also means learning how NOT to do it. There are quite a few pitfalls to avoid (more on those later) so learning about them upfront will set you up for success. Find the Right Property As you might imagine, the most critical part of the fix and flip process is finding the right property, to begin with. The key is finding a property that needs enough work that you can increase the value but not so much work that you are going to sink too much money into and not make enough profit when you sell.  Beyond the house, the location is just as important, maybe even more. Flipping in a desirable neighborhood is a great way to ensure that a large swath of potential buyers will be interested in the home once you fix it up and list it for sale.  Foreclosures When a homeowner can’t afford to pay their mortgage, sometimes they go into foreclosure. This means the bank puts the home up for auction to try and recoup the money they lent the borrower to buy it.  The auction is offered at your local county courthouse. This is a good place to find potential flip properties because they are often priced well below their market value. Before you attend a courthouse auction, check the local papers for the properties that will be auctioned off. This way, you can research the properties ahead of time. Tax Sales When a homeowner stops paying their property taxes, eventually the county tax collector will sell the property at auction to recuperate what the county is owed in delinquent taxes. These auctions are published online and in local newspapers. Often times houses sold at tax auctions need a lot of work and are good candidates for a fix and flip. MLS Sites like Zillow and Realtor.com take listings from the multiple listings service (MLS) and feed them into their sites for consumers to peruse. The MLS is the real estate agent online system where agents list properties for sale.  For sale by owners (FSBOs) can list their properties on the consumer-facing websites as well. In addition, listing agents and homeowners can promote their listing on these sites up to 30 days before they officially go on the market.  Expired Listings When a home listed for sale sits on the market too long without an accepted offer it can sometimes expire. Searching for these on the MLS can result in great possible fix and flip properties. When a listing expires, sellers often become anxious and more motivated to sell. This means they may accept an offer at a reduced price. If you go this route, make sure you research why the home didn’t sell when it was originally listed. If the house needs to be fixed up to sell, that’s a great flip opportunity. If the lack of selling had to do more with the location, not so much. Leverage Your Network For any success in the real estate industry, networking is critical. The grocery store, golf course, community groups, and any other places people gather are full of potential property buyers and sellers.  For flips, network with the types of professionals likely to have the inside track on a possible deal. This includes attorneys, lenders, and real estate agents, among others.  Public Records Local government records indicate when houses were sold, the price, and any foreclosures or distressed properties that might be available. In addition to foreclosures, these records will have a list of short sales and pre-foreclosures as well.  Location is Everything You

Refinance a Hard Money Loan to a Conventional Loan

How to Refinance a Hard Money Loan to a Conventional Loan?

If you have a hard money loan on your investment property, you are most likely paying a higher interest rate than you planned for in the long term. You might also be facing a looming payoff date with a large balloon payment. One way out of this situation is to sell your property. But what if you want to hold onto it for a longer period of time? You can do this by refinancing your hard money loan into a conventional loan. Hard money loans can help you move quickly when you are purchasing a property. However, conventional loans are usually better for your long-term investment property ownership plans. Let’s dive into what these types of loans entail and how to switch from one to the other. What Are Hard Money Loans? A hard money loan, also known as a private money loan, is issued by private investors as opposed to traditional lending institutions like banks and mortgage companies. Since private lenders don’t have government oversight, they don’t have the same legal restrictions working against them. This allows them to be more creative with the loan terms they offer. Hard money loans offer a few advantages over conventional loans, but there are some drawbacks as well. Hard money loans usually require less upfront money compared to traditional loans. This includes smaller down payments and lower closing costs. This allows income property real estate investors to enjoy higher returns on their investment. Hard money loans don’t require extensive loan approval processes like the underwriting that accompany conventional loans. While conventional loans can take 30 days or more to approve, hard money loans can be done in a matter of days.  The requirements for the borrower are much more lenient for hard money loans compared to conventional loans. Credit score, debt to income ratio, savings, and income requirements are all at the discretion of the private money lender. This can increase the likelihood of approval and also speed up the process.  The terms for a hard money loan usually differ greatly from conventional loans. In most cases, the loan term is on the short end (6 to 12 months). In addition, the mortgage interest rate is usually higher. The speed, lack of borrower requirements, and lack of regulatory oversight allow hard money lenders to charge a higher interest rate than conventional lenders.  What Are Conventional Loans? Conventional loans are mortgages that meet the requirements of government-sponsored organizations called Freddie Mac and Fannie Mae. These companies purchase mortgages from lending companies and then sell them to mortgage investors. Conventional loans are sometimes called conforming loans because they conform to the standards set by Fannie Mae and Freddie Mac.  Conventional loans can vary, but there are a number of minimum requirements they must adhere to. These include minimum down payment amounts, the need for private mortgage insurance in some cases, credit score requirements, and debt-to-income ratio (DTI) requirements. Down Payment Requirements for Conventional Loans Some borrowers can get a conventional loan and only put down 3 percent of the sales price as a down payment. This is usually only for first-time home buyers who purchase a single-family residence. The interest rate is higher for other types of borrowers. If you are not purchasing your first home and your income is more than 80 percent of the median income where you live, you will be required to put 5 percent of the sales price as a down payment. This is the same amount required if you are purchasing a second home, like a vacation house.  If you are buying a multi-family investment property the down payment requirement will usually be higher than loans used to purchase a single-family home. You may have to put down 15 percent. Credit Score Requirements for Conventional Loans Usually, but not always, a credit score of 620 or higher is required for conventional loan approval. A credit check performed by your lender will occur at the beginning of your loan application process. If your score is too low and your loan isn’t approved, you may need to consider a hard money loan where credit score requirements are flexible.  Private Mortgage Insurance (PMI) for Conventional Loans  For conventional loans that have a down payment amount that is under 20 percent of the purchase price, private mortgage insurance (PMI) will be required. This insurance protects the people investing in your mortgage in case you default. The amount varies based on loan type and your borrower’s creditworthiness. PMI is usually rolled into your monthly mortgage payment.  Debt-to-Income Ratio Requirements for Conventional Loans Your debt-to-income ratio is a measurement of how much debt you have compared to how much income you have coming in each month. Add up all of your monthly minimum loan payments (credit cards, car loans, etc.) and divide that by your gross monthly income and you have your DTI. Most conventional loans require a DTI under 50 percent.    Why Switch From a Hard Money Loan to a Conventional Loan? Hard money loans provide funds to purchase properties for borrowers that might not otherwise be approved for a loan. They allow you to close on a loan on a property quickly without the requirements and red tape of a conventional loan. However, hard money loans are rarely a long-term solution. Their term length is usually only 6 to 12 months, so when that timeline is nearing its end you are going to need to pay off the loan or explore other options.  Hard money loans also tend to have higher interest rates than conventional loans, so switching can help you save money each month.  For the first few months (or even a year) of owning an investment property, a hard money loan can work, but eventually, you will need to sell the property or pay off the loan. If you want to keep the property and continue enjoying rental income, but don’t have the funds to buy it outright, switching to a conventional loan is usually your best option.