I work with many real estate investors, many of which are doing fix and flip transactions. Fix and flip transactions are short term deals with a property in need of repairs being acquired under market value, being rehabbed to bring it into compliance for conventional lending and to bring some curb appeal to the property and then being sold to an end consumer for market price.
With these types of transactions, many investors are looking to leverage their existing capital in order to be able to do more than one project at a time. For these types of situations, it is important to have creative financing options available.
One hard money fix and flip loan program that is very popular bases lending on the after repair or as complete value of the property rather than the purchase price. This often times allows for a loan amount in excess of the purchase price to be made. In order to make these types of aggressive loans, however, there is some back end structure that is needed.
If a loan is going to be made based on a completed value, it is important to ensure that the property gets improved to that point. Hence the reason why these types of loans include a builders control account. This is simply an account with funds held for the work to be done. These funds are released as work is done, ensuring that the lender funds are secured by an increasing property value.
In addition to a builders control account, it is typical to have an interest reserve account set up. This is similar to a builders control account except for the use of funds. These funds are used to make the loan payment each month.
When taken as a whole, this type of loan can be beneficial to real estate investors as it 'front loads' the costs. Once escrow closes, the investor should not have more out of pocket costs on the project unless there are overruns on the rehab or the property is held longer than the interest reserve is set up for (typically six months). In addition to ensuring all the funds are there to complete the project, the ability to fund based on an after repair value allows the real estate investor to leverage their existing cash, reducing the amount they must outlay on each project.
For more information on these types of loans, please visit our rehab lending page.
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