There are many types of loans for real estate, not all of them are appropriate for every situation. In fact, some mortgage loans are downright unwise for certain kinds of investments, particularly for short term investments like flipping houses. This guide compares traditional mortgages to short-term fix-and-flip financing, and describes different types of fix and flip loans.

Traditional Mortgages

Traditional mortgages may be the type of loan that new rehab investors are the most familiar with. The lower interest rate of traditional mortgages may seem inviting at first glance. However, banks will almost never approve a loan on a house that needs substantial work. If the house only needs very minor cosmetic work then in some cases they may approve a loan; however due to their very slow process and all the red tape it will almost never be practical. In fact that is the fastest way to lose out on the offer and ruin your reputation for being able to close fast as most likely you will be kicked out of escrow for not being able to perform/fund on time. Remember the selling agent will  almost always have back up offers ready to close all cash or very quick escrows. Also, many conventional loans may justify the lower interest rate by charging significant prepayment penalties for borrowers who pay off the loan early. The penalties alone may negate the benefit of a low interest rate. Regular mortgages are almost never the best choice for investors who want to purchase a home and pay off the loan in a short period of time.

Fix-and-Flip Financing

Lenders like Aztec Financial offer funding for real estate investors who want to buy a property, fix it and flip it in less than a year. These fix and flip loans tend to be less like a traditional mortgage because they require a different application process. Some of the differences include:

• no income verification
• no minimum down payments
• no upfront appraisal fee

The interest rates are slightly higher than traditional mortgages but the loan is much shorter, typically 6-12 months and never have the prepayment penalties traditional mortgages carry.

LTV/LTC Loans

Loans for both traditional home purchases and for home flipping can be made based on the home’s current appraised value, called “loan-to-value” (LTV). LTV loans have limits based on a set percentage of the home’s value as-is, typically 80-95 percent of the existing property value. These types of loans are usually best for investors who simply need funds to purchase the home and already have their own funds to do the rehab.  Some lenders  like Aztec Financial also make loans based on ARV or after repaired value. This type of loan may give you not only the purchase price, but also the costs to repair the property. This is a much more leveraged loan which allows you the borrower more freedom with your cash flow.

ARV Loans

In most cases, loans based on the after-repair-value (ARV) are ideal for flip investors. Sometimes, a home buyer gets a truly phenomenal deal on a home that will, after repairs, increase in value by 50 or even 100 percent after renovation. ARV loans are based on a percentage of the home’s expected future value after the work is complete, usually 65-75 percent of the ARV.  With a good buy on a property, some investors can get funding based on the ARV and have plenty of money to buy the home at 100 percent financing, with extra cash to finance repairs and upgrades. Flipping homes has reached a two-year high. More and more investors are finding access to appropriate forms of financing for their real estate investment plans. Many people find that basing their financing on the ARV of the home simplifies the process and provides them with the money they need to make renovations to prepare the home to sell. Aztec Financial has 29 years of experience as a direct lender for investors who want to fix and flip homes. Contact us to find out our loan options that are tailored for home flipping.

Popular television programs make fixing and flipping homes look like a fun way to make a significant profit quickly and easily. But before jumping into the market and tackling a fix-and-flip property, it is essential to consider 10 specific challenges that can make or break the sale.

1. A Flip is an Investment, Not a Home

When buying property, it’s easy to become emotionally attached. This is fine if the buyer plans to stay in the home as a primary residence or own it for longer than 12 months. But a property to flip is an investment. Make decisions for improvements/repairs by focusing on budget and ROI (return-on-investment). Home flippers can’t always make design choices based upon personal taste. These decisions need to be based on what’s best for the investment and the ultimate goal — the sale.

2. The ARV of the Property is Important

The ARV or After Repaired Value is a key factor when flipping a house. U.S. News Money states, “Experienced flippers recommend buying properties in which the ARV is no more than 70 percent of the estimated sales price.” Knowing the ARV of the property is as important as the right buying price.

3. The Buy Price Can Mean Difference Between Profit and Loss

As a house flipper, the buying price is a critical number. Overspending on the house makes it difficult to break even, let alone make any money. The lower the buy price, the better the opportunity to make a significant profit.

4. Fix and Flip Loans are Available

It takes money to buy and flip a home. When starting out or when funds are tied up in other investments, a house flipper may need financial assistance. Conventional lenders will not usally offer the type of financing needed to fund a house flipping investment . Look for a lender that helps investors and house flippers with no-hassle underwriting, and solid financing through fix and flip loans so the project can move forward and money can be made.

5. Location Matters

A house flipper can purchase a property cheap and make it look gorgeous, but it won’t sell for top dollar if the location doesn’t entice buyers. Houses located on busy and/or noisy streets, near railroad tracks, or on a block with boarded up buildings are not prime locations. Buyers want attractive, safe neighborhoods and homes with easy access to amenities, schools, and public transportation.

6. Know Neighborhood Comps and Trends

If the neighborhood comps had kitchen upgrades that cost around $15,000, the ROI for a full remodel at $25,000 may not be worth it. It pays to know the current design trends and what’s selling in the neighborhood. What are buyers looking for? If granite countertops with a farmhouse sink are the must-haves, design to those particular buyer trends.

7. Be Aware of All Costs

Buying a house to flip for $100,000, investing $50,000 for repairs/remodeling, and then selling the house for $180,000 doesn’t mean the profit is $30,000. Several cost factors must be considered.

•         Cost of repairs, overruns, including labor/materials
•         Soft costs when needed; such as engineering, soils, geo report,property survey,Permits, architectural services and various city fees.
•         Closing costs, commissions, debt service (The mortgage payments you made while holding the investment), insurance and other miscellaneous fees
•         Taxes

Unexpected costs like the removal of asbestos, lead paint, or to bring the electric back up to code also add up.

8. A Solid, Reliable Team is Essential

Every house flipper needs a good, reliable contractor. The contractor helps with the initial evaluation of the home before purchase to let the house flipper know what type of issues the property has and how much it will cost to fix. This helps determine how much to spend on the purchase. Along with a good contractor, round out the team with a talented landscaper and design expert when necessary; especially on the bigger, more sophisticated projects.

9. Professional or DIY Skills Save Money

Investopedia states, “The real money in house flipping comes from sweat equity.” Any time the house flipper can do repairs, the overall costs lower, increasing the profit margin. However, never overestimate DIY skills, because if the job is done poorly or incorrectly, a pro has to be hired and now the savings (and time) has been lost. Also as you start growing you want to keep in mind in order to further grow you need to be in a position to work on your business vs being stuck  working in your business.

10. Realistic Timelines Keep Costs Down

Expect it to take time to get all permits and inspections complete, but follow up to ensure everything is processed without delays. Planning and sticking to a timeline is essential to stay on budget and keep costs low. Money can be made flipping houses. “Homes flipped in the first quarter of 2016 yielded an average gross profit of $58,250, the highest average gross flipping profit since the fourth quarter of 2005,” reports Marketwatch. When ready to flip that first or 50th home, look to Aztec Financial for affordable Fix & Flip Loans and for the help needed to realize your dream and achieve real financial freedom.

Having the right lender on your team is the heart and soul of most real estate flipping strategies. Successful and profitable house flipping depends on two key elements: one, you have to have access to properties worth rehabbing and two, you must have the money to snatch them up before another investment buyer comes along. That is where having a qualified lender in your corner is the difference between a money-making investment and losing out while you wait for the paperwork.

Making Your Millions

Andrew Carnegie once said that 99 percent of all millionaires made their fortunes through real estate. You hear stories about people making millions buying houses for cash, fixing them up and then reselling them, but how do they do it? No successful real estate entrepreneur lives in a vacuum. Whether they are new to the idea of flipping or veterans in the field they all have one thing in common – they know the importance of partnering up with businesses and investors willing to bankroll their talent. Finding credit resources is an essential part of success in the field of real estate.

The Role of a Lender

Lenders do more than provide a credit line, though. They are part of a network of professionals that want to see you do well which each deal; because when you make money, so do they. Companies like Aztec Financial have the experience to guide you and help you make smart choices that improve your chances of turning a profit. That connection to a solid financial company opens doors to REO selling agents, as well. You develop a reputation as a serious investor and gain access to more profitable listings with each successful deal.

The Power of Experience

Real estate investment is not a get rich quick scheme, according to expert flipper and author Eric Tyson. An established lender has the experience to go the distance and recognize that hard work is part of the formula. What this means for the real estate entrepreneur looking to get into flipping is you need a lender who has been in business for decades because they offer a solid financial foundation – one that will be there with funds when the time comes to buy. You want a lender that has been specializing in the fix and flip niche and has done thousands of transactions over the years. You also want to deal with a lender who is flexible enough to custom make a loan program specific to your business model.  Most of all you don’t want a fix and flip lender that thinks they are a bank, requesting verifications, bank statements etc. This will only serve to slow down the process. What you need is a no red tape lender that is nimble and can move quickly on your behalf. You want a lender that gets it, and understands that the underwriting is primarily based on the upside of the property you are buying! House flipping is a balancing game that comes with risks, too. It takes money to make money whether you are the buyer or the financier. Look for a financial partner with a ton of experience in the industry – one who understands what you need and is willing to work with you.

A Flexible and Rewarding Loan Program

Ultimately, it is up to you to find the best deal out there, but what else should you look for in a lender?

• No upfront appraisal fee is a good place to start. Without that upfront charge, you are free to discuss any potential deal with your financial partner and get feedback. Take advantage of their years of experience to find the most profitable properties.
• Flexibility is another key asset to watch for because not all deals are created equal. You want a lender who will customize a plan for you based on your experience and track record.
• A quick and easy application process without all the red tape that goes into most loan scenarios. If you have to wait for more than 24 hours for your lender to make decisions or provide an approval, you lose out on deals, because timing is everything in real estate investing.

Look for a financial company that sees the potential in working with you and building a relationship that will be mutually beneficial for many years to come. Aztec Financial is a leader in the fix and flip loan market with a reputation for making even difficult loans possible. Whether you are buying your first property or your 50th, give Aztec Financial a call and get a quote today.

How quickly you can fix and flip your rehab property will determine how successful you are in this business. Moving through the fix and flip process quickly, however, doesn’t mean blindly rushing through it. It means efficiently putting every piece of the puzzle together in a way that maximizes your profit in the end. In this section, we’ll look at some ways to do just that.

Build Your Startup Fund First

Any type of home construction begins with home construction funds. You already know this, but you also need to know the process of financing home construction as much as, and even more than, you need to know the process of home construction itself. If you aren’t managing your finances efficiently, you aren’t going to make any money on your rehab properties. So start by building up your cash reserves as much as possible. This will allow you to operate more freely when the very common overruns hit you during the rehab process, as well as qualify quickly for fix and flip loans you will want and need along the way. You will be able to efficiently take full advantage of the home construction financing system, allowing you to maximize profit in the end. Buy quick, sell quick.

Start with a Plan

Upon your very first walk-through of potential rehab properties, you need to be able to develop a near-complete home construction plan. This is something that you will get better at with experience. As you put this skill into use, it will allow you to determine whether the property is even worth trying to fix and flip, and if so, what the game plan will be. Your home construction plan will consist of the following: complete list of what work needs to be done on the house; an initial estimate of that work; how that work fits into your — and your subcontractors’’ — schedules; and how those costs fit into your budget. Once you acquire a house, develop a more concrete plan from demolition through to touch-up paint and listing the house.

Know the Paperwork

Knowing how to navigate the maze that is local county and city building codes and permit processes is another core part of being able to fix and flip rehab properties quickly. It is very easy to get bogged down in this bureaucracy, especially for beginners to the home construction process. If your house will require a building permit (remember, as well, that it’s good to know what does and does not require a permit), start by building good relationships with architects and structural engineers. A good contractor and or project manager should be able to competently navigate this process. Saving money and moving quickly with the blueprint process means starting fast on your goal to sell faster with more profit. Be diligent about submitting your drawings and fees to the proper government office, and about checking in with them to make sure they have everything they need to approve your permit.

Structural Integrity of the Rehab Property

Speaking of structural engineering — try to avoid it if at all possible. When you do your initial walkthrough of your potential rehab property, you need to be able to tell whether or not it is structurally sound or not (no cracks in the foundation, no seriously crooked or sinking interior lines, etc.). If you notice any structural issues, pass on the property. If it’s too good to pass up, make sure you get at least 3 bids from structural engineers and build in an extra cushion of profit, which means you will be buying this type of property at a steeper discount. Also keep in mind that structural drawings and permits may be needed — if you want to remove a wall to open up the floor plan. Keep in mind that doing so will be more expensive and timely if it is a load-bearing wall.

Pick Materials Before Breaking Ground

If you talk to general contractors (and you should), the one thing they will tell you slows down their jobs more than anything else is having delays in making decisions on materials. When you learn this key lesson early on, you can buy and store the longer order materials long before you will need them. This may include certain appliances, electrical and plumbing fixtures, doors and windows, flooring, etc. This way you will have them on the job the exact moment they are needed, rather than wasting time waiting around for them. And, of course, be diligent about buying the right materials. Take advantage of deep discounted items by buying in advance and storing them to save money.

Co-ordinate Sub-contractors

The second biggest time-waster general contractors will tell you, if asked, is, their sub-contractors are not completing their portion of the job in a timely manner; or doing so in a shoddy manner. Getting held up on one part of the house or not passing an inspection will kill your schedule and put a related dent in your profit margin. The ability to effectively manage sub-contractors is a topic we covered before, and for good reason. It is key to effectively managing the time (and hence money) it takes to fix and flip your rehab properties. Learn this skill by getting subs you can trust and talking to them before they even get on the job about everything they need, to get in and out as efficiently as possible. Then get them together formulate an operational plan, and execute your schedule — let the plumber know the exact date the carpenter will be ready, the painter when the drywallers will be done, etc. Be the boss and do what it takes to stay on schedule.

Location, Location, Location

Know where to buy. There are the neighborhoods that are trendy and up-and-coming, where you can still buy cheap and watch your investment grow. There are also the neighborhoods that are highly in demand where you can buy at a higher price but still turn a profit. Look for the ugliest house on the nice block. The one underlying criteria for all desirable locations, though, is good schools, and easy proximity to jobs, shopping, etc. Homes on the market that are in sought-after school districts and or close to the stores typically sell faster than homes that aren’t.

The View from the Curb

Throughout each step of your fix and flip, you should be making decisions based on your potential buyers’ desires. And the first thing that they are going to see when they pull up is the exterior of your house. If it is clean and welcoming, they will want to explore further. If not, you’ve stacked the deck against yourself for no reason. Also, don’t forget the landscaping. I see far too many times where an investor does all the right things except skimp on the landscaping and then wonder why their house is taking the long to sell. Finding beautiful yet cost-effective landscaping measures will go a long way to quickly endear buyers and drive up that sale price.

Like any business, working to fix and flip rehab properties has its pitfalls. But you can learn to navigate these pitfalls in a successful way; if you’re resilient, learn from mistakes (yours and others), you’ll be able to effectively accomplish your goals. In this section, we’ll look at some of the top mistakes people make when trying to flip houses, and what you can do to avoid them.

1) Starting with An Unbalanced Sheet

The home construction process is much easier if you’re not starting in a financial hole. Real estate investors get in trouble with get-rich-quick schemes, not having enough startup funds, and over-leveraging themselves. In short, they find trouble when they do not have the money to get started, including the access to financing. Avoid this trap by getting your finances together before you start buying. You certainly don’t need to be a millionaire, not even close, but you do need to be ready to incur costs. Don’t invest your life savings in any one project. The best fix and flippers leverage their funds by spreading it out over several properties, using financing to cover the bulk of their purchase price and to cover their rehab/construction funds.

2) Not Knowing Costs

Most people have no clue what it actually costs to fix and flip rehab properties. If you’ve done it a few times, you should have a grasp on what your budget for everything — from landscaping to finish paint, both materials and labor — might be. But even then, prices are constantly changing depending on the market as a whole. If you’re just starting out, avoid cost overruns by doing your research first. Actually get bids from subcontractors and price materials from wholesalers. One “I can’t believe this is that expensive” moment, and you’re already starting to chip away at your profit margin.

Also it is imperative that you protect your investment in your mini business called fix and flipping with certain precautions: 1) Have the right insurance in place, including insurance against theft/vandalism. I’ve seen too many times where investor’s profits have been completely erased because someone took off with their materials they had on site or stole the appliances, or ripped the copper plumbing right out of the walls, causing much collateral damage in the process, or stole the water heater. I could go on and on. Don’t be penny wise and pound foolish; make sure you have the right insurance. Also protect your investments as they are being worked on from the very start to the very end until you close escrow with the new buyer as it is your responsibility until escrow closes. Many investor developers will put in an alarm system once the place is secured and can be locked up. Today this is a very inexpensive option. Some have one of their subs stay at the house while it’s being worked on. Some pay the neighbors a small token to watch and call them on their cell phone if anything looks suspicious.

It is also worth reminding you that this fix and flip game is all about getting the work completely finished and sold as fast as possible. The quicker you can do this, the more profit you will make. If you drag your feet you will make less and your lender will make more money in interest. The goal is to put more money in your pocket so efficiency is the name of the game from to start to finish.

3) Doing Too Much of the Work Yourself

On that note, know your limits when it comes to your own labor. You should find out what you can do yourself to save costs, and learn to do those tasks efficiently and well. But, it is just as important to know when it makes sense to have a sub-contractor do the work. If they can do it faster and better than you, find someone you trust to do so. People get bogged down when they think they can save money, but then lose time (and then more money later on).

4) Design Overboard

Don’t put too much into your rehab properties. They are not rehabbed to win design awards (say no to those crystal wall sconces). Home construction isn’t always a contest. In fact, the less you put into it can be directly correlated to the most you can get out of it. If you are efficient with the materials and processes you use, you can do the exact minimum to get the most profit from a rehab property. Remember the standard of rehab is dictated by your immediate competition in your immediate neighborhood. You don’t want to deviate too much from that, either positively or negatively.

5) Not Properly Reinvesting Profit

Only a small number of real estate investors will turn good profits consistently day in and day out, regardless of the market. You can become one of those investors if you are diligent, and keep learning and improving your process. If you seek to continue your business of working with rehab properties, learn from the smaller successes and failures that underpinned your last project. Then, apply those lessons – and the profits you made – on your next project. This can include everything from buying in a different neighborhood to using a different kind of paint on the interior trim. You will soon develop a rhythm and your own personal style and you’ll have your own personal recipe for success.