Loans for fix-and-flips are changing fast. Here’s what you need to know.
There are two ways you might be thinking about loans for fix-and-flips right now.
First, maybe you have a property on the market now you’re trying to get rid of.
Second, maybe you’re planning for what’s going to happen with flips in the near future.
In about six to twelve months, the market is expected to have another shift. Prices should come down, and better properties will become available.
To be ready for those upcoming opportunities, here’s what you need to know about loans for fix-and-flips now.
Money Tightening on Loans for Fix-and-Flips
What does it mean for real estate investors when the Fed starts tightening money? Lenders start to pull back.
Lenders want to wait to figure out what will happen with the markets. Their money isn’t returned as fast as usual because investors’ properties take longer to sell. Less money becomes available overall.
This tightening of money results in many recent changes we’ve seen in loans for fix-and-flips.
Changes in LTVs
The loan-to-cost or loan-to-ARV on properties has lowered, and appraisals are being cut. The average LTV used to be 75%. Now, most lenders have pulled back to 65-70%.
Lower LTVs mean you need to bring more money into a deal. It’ll take more out-of-pocket to actually close on a property in the current market.
With low LTVs and lenders being picky with transactions, it’s important to only take fix-and-flips you can obviously turn a profit on.
Home Value Changes
While loan-to-values are going down, credit score requirements are going up. Typically, lenders’ credit score minimums start at 620 or 640. Now, many lenders won’t take anyone with lower than a 680 or 700 score. Six months from now, that could become even tighter.
If you’ve been investing for a while, you’ll need to change how you look at leverage. For the past ten years, lenders have been seeking you. Now, you’ll have to proactively find your money. It’s more important than ever to plan your funding.
Rates on Loans for Fix-and-Flips
What do rates look like for fix-and-flip loans currently?
You can probably guess – rates for all loans have gone up.
At The Cash Flow Company, we represent about five or six capital funds. We’re always looking for the ones with the best rates, but still – there’s nothing much available in capital funds lower than a 10-12% interest rate.
Six months ago, you could find these same loans for closer to 7-8%. This is the squeeze. This is the tightening the Fed wanted when they raised interest rates. Now it’s affecting your loans for fix-and-flips, but you can still get prepared for better opportunities.
Advice on Flips for the Next Few Months
There are a few things we recommend to set yourself up for success with flips in the next few months.
- Smaller Projects – Smaller, lower price point homes tend to sell better in this type of market.
- Bigger Neighborhoods – Outlier, rural properties were popular in the midst of the pandemic. But now those same properties are sticking on the market for a long time. Keep your flips inside a big, good neighborhood.
- Aggressive Funding – Be proactive and relentless in your search for funding sources (or have someone searching on your behalf). When great new deals come, you’ll be one of the few investors who is ready.
- Consider getting a HELOC on your home now so you have available funds when you need them.
- Call banks and other lenders to stay updated on their requirements.
- Find OPM lenders. Especially in an economy like this, people with money want safe, secure returns. Getting those people to fund your investments can help you take advantage of upcoming low prices.
We Can Help with Loans for Fix-and-Flips
We’re always looking for the best loans. We spend time talking to lenders on your behalf, getting loans with the best terms and requirements, that best fit the current market.
If you have or want a flip, reach out to us. We have many sources that are still looking to lend – capital funds and hard money.
You can also bring us your questions on OPM – from finding lenders, to attracting them, to closing with them.
With any of these questions or more, email us at Info@TheCashFlowCompany.com.