Craven Academy: Real Estate

Since we are talking about flipping it is highly likely that the property will not qualify for a conventional loan. If that is the case, what do you do? One option is to use lenders that specialize in difficult to place, or non-traditional loans. These are known as Hard Money Lenders (HML). Because these loans pose a significantly higher risk for the lender, you can expect to pay more in the form of higher rates, points and fees. Hard money loans are generally associated with borrowers who have bad credit but they really apply to any difficult to place loans.

How are flipping loans different? A traditional loan is based on the value of the property as well as the borrower's ability to repay. A flipping loan is based primarily on the value of the house after repairs are made. This is known as the After Repair Value or ARV. Most hard money lenders will offer loan amounts up to 65 or 70% of ARV. The cost of the repairs can be included in this amount. Let's say that you purchase a house with an ARV of $100,000, if the lender will allow 70% of ARV that means you can get a loan of $70,000. If the purchase price of the home is $50,000, you would be left with $20,000 for repairs ($70,000 - 50,000 = 20,000). Money that you borrow for repairs is usually held in an escrow account and disbursed to you in a series of draws as repairs are made.