California's real estate market offers plenty of upside opportunities for fix and flip investors. In particular, the San Francisco Bay Area provides real estate investors with a highly liquid market. Many areas have homes that sell with lower days on market than other locations. Finding a profitable fix and flip deal with a property that can sell quickly once completed is an ideal situation, especially for real estate investors utilizing fix and flip loans in the San Francisco Bay Area.
Understanding how these private hard money rehab loans work is crucial for any investor interested in this type of financing. In particular, new investors need to have a full understanding before jumping into a project. In this post we will look at hard money fix and flip loans in California and some of the nuances to be aware of.
Rehab, fix and flip and ARV loans are all talking about the same product. These are short term financing solutions that take advantage of the after repair value of a property to provide more leverage than a straight acquisition loan can. That is the main selling point for these types of loans - the additional leverage that can be obtained. By leveraging the ARV amount and basing the loan on that value rather than the purchase price, cash required to be brought into the transaction can be lowered - sometimes substantially.
One key feature of these loans is the fund control account. Since these loans are funded based on the after repair value, the total amount of rehab work to be done must be held in a fund control account. That amount is part of the loan - so when your loan funds the money needed for rehab is available. Having these funds available for the rehab work is one way fix and flip loans can be a valuable tool for investors, however it is important to understand the fund control process as they are not all the same.
Most fund controls will release funds in arrears. So work will be done, an inspection will be ordered and a percentage of completion for each rehab line item will be assessed. Funds will be released from the fund control account based on these line item completion amounts. So for example, if you have a line item for flooring and you call for inspection when the flooring is 50% complete, you can typically expect to receive 50% of that line item from the fund control.
Knowing that your funds will be released in arrears after work is done is important. This means that once you close, you should have some additional cash on hand to get work going through your first inspection and reimbursement.
Less common fund control set ups involve funds being advanced for work to be done. Typically these will require invoices, estimates or details on cost of materials in advance - and then once released copies of paid invoices and receipts. Having a fund control that will release in advance some or all items means you need to have less cash on hand to prime the rehab work. Often times private hard money rehab loans with this type of fund control will cost a little more than the more traditional pay in arrears fund control.
Other fund control set ups can be a hybrid of these two described above. They may allow for some line item advances to get work started, such as contractor deposits, and then pay other line items in arrears after inspection. Understanding your particular fund control process is important as an easy and swift fund control means a faster project completion, faster sale, and less interest paid - increasing profits.
Most of these fix and flip loans in California are structured with interest only payments. These payments are typically monthly. Some loans will include an interest reserve funded with the loan. Having an interest reserve means you have a period of time where you do not need to make payments out of pocket, allowing you to focus on getting the work completed and not worry about making monthly payments.
Most of these hard money rehab loans in California are short term. 12 months is a common term length, although some will go out 18 or even 24 months. Typically there is no prepayment penalty - so taking a longer term if available can be a good decision in case there are delays in the process. While these loans are expensive, having to refinance into another private money loan partway through the rehab process because your loan is coming due is even more expensive.
We specialize in private hard money loans throughout California. We are located in the San Francisco Bay Area, and love working locally. We have many different loan products for fix and flip investors. If you are looking for a fix and flip loan in the San Francisco Bay Area, or anywhere in California, give us a call at 877 462 3422. We are always happy to discuss options and run scenarios!
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