13 Must Ask Questions When Getting a Fix-and-Flip Loan
5 min readThu Oct 27 2022

Real estate fix and flip deals are typically lucrative. The market isn't as inundated as the single-family market, which can result in higher and more sustainable margins. Another aspect of these margins is the role flippers play in the real estate ecosystem. That vital role — bridging the gap between vacant units and buildings and potential tenants or investors — can lead lead to lucrative ROIs in the real estate business.

Regular lenders and banks still use outdated and archaic ways of assessing eligibility for real estate loans. But that is not how it is with the private money lenders. These lenders examine the property's potential, the strategy to flip it, and the time it takes to complete the project before offering a loan. In a matter of days, you'll have a response, giving you the power to leverage deals. But, before you decide if a loan is right for your ambitions, these are the questions you need to ask.

3 Questions to Ask Before Approaching a Lender for a Fix-and-Flip Loan

Before you approach any lender — including hard money or private lenders — do your due diligence.

#1: What are the Risks Associated with Fixing and Flipping CRE?

While there are tremendous benefits involved in fixing and flipping real estate, there are also risks associated with the venture. The risks can either be attributed to human error or market conditions.

Human error usually includes overestimating the after-sale value or underestimating the time and cost to repair.

Market conditions mean that while your estimates may be accurate when getting the loan, conditions outside of your control make your figures redundant.

Consider if you have the finances to weather either of these outcomes.

#2: Do I Have the Funds to Complete the Project?

A fix-and-flip loan covers a percentage of the cost of buying and repairing the property. Anything outside that percentage will need to be covered by you. If you can't afford this scenario, you may not be ready to take on a fix-and-flip loan — unless you decide to bring on a partner.

#3: Do I Have Collateral to Help Finance the Loan?

Although not every lender will need you to have collateral to qualify for a fix-and-flip loan, having collateral could serve as a buffer to bridge any down payment requirement deficiencies.

10 Questions to Ask About Fix-and-Flip Loans

Once you have answered and are satisfied with your preliminary answers, it's time to approach a fix-and-flip lender.

#1: What are the Interest Rates and Points Associated with the Loan?

To ascertain your ROI, you need to consider the interest rates and — if you're using a hard money lender — points related to the loan.

#2: Are there any upfront fees?

Beyond the down payment, many lenders have closing costs triggered when you receive the loan. Ask the lender what these costs are, and include them in your project cost.

#3: What are the Down Payment Requirements?

Regardless of whether or not you have collateral to back the fix-and-flip loan, lenders may still require you to make a down payment. Enquire about these requirements and how a down payment may impact interest rates, points, and fees.

Hard money lenders could ask for a down payment of as much as 25 percent. But many lenders will accept a down payment of 10 percent or lower. If you opt for a lower down payment to keep more liquid cash for the project, will you be subject to higher rates, points, penalties, or costs?

#4: What are the Loan Terms?

The loan terms dictate how much your monthly repayments will be and when the loan is due. These figures and dates are crucial to planning your project. You'll likely have to make repayments while the property is being repaired: are these within your project's scope? Also, does the loan afford you the time to get the property market ready, even if there are sudden or unexpected delays?

#5: Do I Need an Appraisal?

Before closing a loan, lenders will often require an appraisal. The appraisal should include an estimation of the current- and after-retail value. While this may be an additional cost you need to budget, it can save you money. If the appraiser finds faults or flaws making the flip unprofitable,  you can forego the deal.

#6: Will the Loan be Based on the Current Value or ARV?

The loan is drawn up according to the after-retail value means borrowers can access more funds for the rehab project. But basing the loan on the ARV also means a higher down payment and interest rates.

#7: What are the Penalties?

If you're ill-prepared for penalties and what triggers them they can be debilitating. Ask yourself, for example, if a penalty is triggered by an extension can you afford it, and will your ROI remain competitive?

#8: How Long Does it Take for a Loan to Close?

A quick closing is essential for leveraging the deals available when buying distressed property. Market conditions can change instantly, and, as a result, the ARV can be reduced, or the cost of completing the project can increase.

Fix-and-flip loans from hard money lenders or private lenders typically close quicker than those offered by banks and can close in under a week. Enquire about the typical time frame should you provide all the necessary material required to kickstart the loan.

But also query the processes — like appraisals — that can delay closing the fix-and-flip loan.

#9: When and How Will Money the Loan be Distributed?

Borrowers enquiring about fix-and-flip loans often aren't aware the money isn't distributed in a lump sum. Lenders do this to protect themselves from risk so that the finance offered reflects the value of the project at that time. To ensure your project goals and timeframes coincide with the payouts, enquire about the distribution of the loans.

#10: What Happens if I Decide to Fix and Hold?

Spending months repairing and renovating a property can ignite certain links between yourself, your partners, and the property. You may see value in the property, but buyers may not, or you could consider the ROI on rental more appealing than a sale.

Whatever your reasons may be, if you ever find yourself flirting with holding onto the property, you need to be aware of the costs associated with this decision. Lenders offering fix-and-flip loans are in the business of turning a quick profit. They make money from leveraging the short-term value offered by the property rather than fees and interest rates like most banks. For this reason, you'll need to refinance the property with another lender and pay off your hard money loan.

Dunmor is ready to assist you in all your real estate lending needs. Our team of seasoned real estate professionals has deep expertise in all facets of real estate lending and investments, and we provide high-quality real estate lending resources to thousands of professional real estate investors just like you.

Contact us today to find out how we can take your real estate investing to the next level.

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