Fix and flip loans

The lender finances a portion of the purchase price and the rehab budget. Rehab funds are typically held in escrow and released in draws as the contractor completes stages of the renovation. The investor is responsible for the down payment, holding costs during renovation, and any overages.

Once the renovation is complete, the investor lists and sells the property. The loan is paid off from the sale proceeds.

Flip lenders look at the deal as much as the borrower. Key factors include the purchase price relative to the after-repair value, the scope and budget of the renovation, the borrower's track record, and comparable sales in the area.

Many lenders have programs for first-time flippers, though they may require a larger down payment or a lower loan-to-cost ratio. Having a clear scope of work, a licensed contractor, and a realistic ARV estimate can help a first-time borrower get approved.

Fix and flip loans are sized against two limits, and the smaller one wins. Loan-to-cost (LTC) is the loan as a share of your total cost, meaning the purchase price plus the renovation budget. The after-repair value (ARV) cap is the loan as a share of what the property should be worth once the work is done, based on comparable sales.

Here is a simple example with round numbers. You buy a house for $200,000 and plan $60,000 of work, so the total cost is $260,000. At 90% LTC, the loan could be up to $234,000. If the appraiser puts the ARV at $360,000, a 75% ARV cap allows up to $270,000. The lower number, $234,000, is the loan. You bring the remaining $26,000 plus closing costs. If the ARV came in at $300,000 instead, the 75% cap would drop the loan to $225,000 and you would need to bring more cash.

This is why the ARV matters so much. A deal that looks fine on cost can come up short if the comparable sales do not support the finished value.

Flip loans are interest-only, so the monthly payment is mostly interest on the balance. On top of the rate, expect origination points at closing and smaller fees during the project, such as draw inspection fees each time you request rehab funds. If the project runs long, extension fees apply.

Holding costs are the part new flippers most often leave out of the budget. Every month the property is not sold, you are paying loan interest, insurance, property taxes, and utilities. A flip that takes nine months instead of five can lose most of its profit to holding costs, even when the renovation goes to plan.

Most flip lenders pay renovation costs back to you after the work is done, not before. That means you or your contractor front the cost of each stage and then get reimbursed through a draw. Plan your cash flow around that timing.

Most flips end with a sale, and the loan is paid off at closing. But some investors decide partway through that the finished property is worth more as a rental. In that case the exit is a refinance into a long-term rental loan, such as a DSCR loan, which is qualified on the rent the property earns rather than your personal income.

If refinancing is a possibility, tell your lender up front. Long-term lenders often require a minimum period of ownership before they will lend on the new, higher value, and a signed lease helps the rent count. Knowing those requirements early keeps the flip loan from maturing before the refinance is ready.

Most flip loans that go badly fail for the same few reasons, and nearly all of them are visible before closing.

Relip is a direct lender that operates 100% wholesale, so flip borrowers come to us through their broker. The broker prices the deal in the Relip Loan Pricer and runs the term sheet, appraisal, credit and title from one platform. The borrower stays the broker's client on this flip and the next one. We never compete with brokers.

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