PROMISES OF FAST AND EASY CASH
We receive hundreds of financing requests each month for fix and flip projects. People think they can make money with no risk and little to no investment of their own money. And why wouldn’t they?
Late night infomercials tout seminars “guaranteed to make you money fast in real estate investing”, DVD programs promise to teach you how to cash in on the house flipping market with no risk, and an internet search returns endless pages of information available for free and for sale.
The market has crashed down from an unprecedented real-estate high – just a few years ago it seemed impossible to lose in real estate. Lenders were approving loans for 100% or more of property values, bidding wars between buyers were frequent, houses were selling for more than the asking price within days of listing. Investors were making money hand over fist.
TODAY’S REAL ESTATE MARKET LOOKS NOTHING LIKE IT DID
Today’s real estate market is operating on an entirely different playing field. The melt-down in the economic markets and the subsequent decline in real estate values has led to the highest inventory of available properties in 40 years at the lowest prices in years. Many folks see this as an opportunity to get into house-flipping and are looking to cash in. Times are different, and so are lending standards.
WILLING TO INVEST? THEN WE ARE TOO
Here’s the truth about risk and reward in the house flipping business in this economy. There’s no free lunch these days, and it takes money to make money. Our fix and flip lending philosophy at ACC Mortgage is simple – no risk, no reward. If you are willing to take a risk, we are too. If you are willing to invest your hard-earned money in a project, then we are willing to lend you money for the project.
We are certainly willing to underwrite fix and flips, and have successfully partnered with investors in many such endeavors. However, the finances must make sense and the risk appropriate for both borrower and lender. So what does that really look like?
A RECENTLY APPROVED FIX AND FLIP LOAN
Here’s a great example of how ACC Mortgage approaches lending for fix and flip investment properties:
• Bank-owned property
• Selling price – $130,000
• Cost to make marketable – $20,000
• Total investment – $150,000
• Estimated selling price after “fix” – $200,000
• ACC Loan Amount – $85,000
• “Flipper” Investment – $65,000
We completed a thorough review of the plans, a market analysis of the area, and an accurate property valuation prior to underwriting the loan. The investor was willing and able to invest in the project and by doing so assumed an equitable share of the risk. The property sold for $200,000 within 6 months of purchase. The investor made close to $50,000 on the deal.
WHY SOME LOANS AREN’T GOOD DEALS
In many of the loan applications we receive the borrower is not willing to take on a fair share of risk. Using the above example, many investors are asking for a $150,000 loan on a house that is projected to sell for $200,000. What if the house sells for $160,000? After realtor fees and other associate selling costs the lender has an extremely high risk of taking a financial hit.
THE BOTTOM LINE
We consider ourselves your financial partner, and as such we require that you share in the risk. Because the lion’s share of the reward will be yours if your investment choices are solid.
