Flipping the Numbers

Michael Bennett

CEO/Owner, B.E. Lending

Flipping houses looks like so much fun on HGTV, and it seems so attainable…until you start to think about financing. Sure, flipping is a lucrative business, but it also comes with great risk. Although it may take some creative number crunching (unless you have a giant pile of cash lying around), you have some good options when it comes to financing your first flip.

HARD MONEY LOANS

Hard money loans, also called bridge or rehab loans, are offered by lenders who care more about the potential value of a property than they do your personal financial history. These are usually short-term loans of a year or less. In Arizona, annualized hard money rates typically range from 12 to 18 percent. When paid off in 3 to 6 months, the actual interest may be only 3.5 to 7 percent.

While the interest rate may be high, you’ll likely have your funding in a week or so, because these lenders don’t care if the property is in disrepair, and they make independent decisions without all the red tape of a traditional lender. What’s more, hard money loans are “non-recourse,” which means you cannot be sued and your credit rating won’t be affected by nonpayment or foreclosure.

Begin your search for hard money lenders online, but beware the hard pitch and possible hidden fees. Many web-based businesses are geared toward flippers, but not all of them have your best interests in mind. Another option is to ask local real estate professionals, investment groups, or other contacts.

PRIVATE LENDERS

A private lender is usually an individual — think friends and family. Borrowing money from family can be risky, but if the paperwork is executed properly and the lender is accredited (get a lawyer), you’ll both be protected.

Private lenders usually offer better rates than hard money lenders, but often require an assignment of the deed in the event of default. They may even stipulate that the title be held in their name until payoff.

When looking for private money lenders, think about friends and family who might have the available capital to invest. You may also find private lenders through referrals or acquaintances.

CROWDFUNDING

Crowdfunding takes place via a website that enables individuals and institutions to collectively lend you money in exchange for a share of profits or a preferred return on investment. Crowdfunding sites generally require personal guarantees on top of high upfront fees, appraisals, and a funding period of 2 to 4 weeks. This can be a somewhat expensive option, but you can generally find a loan regardless of your financial profile.

To find crowdfunding options, look for a website that specializes in financing, as typical sites have a cap on how much money you can ask for.

TRADITIONAL BANK FINANCING

Traditional bank financing is probably your worst option. Traditional non-owner-occupied mortgages may offer the lowest interest rates, but they carry long terms, and your business is in short-term flips.

The paperwork is just what you’d expect, requiring tax returns, paystubs, disclosures, and an in-depth analysis of your personal financial profile. Traditional lenders also typically have restrictions on the condition of the property you’re looking to buy, and there are limitations on the number of federally backed mortgages you can hold.

If you have enough equity in your primary residence, you may be able to avoid some restrictions with a home equity loan or line of credit. Be careful, though: if your investment takes a tumble, you could lose your house and ruin your credit, among other things.

Just as the name implies, you’ll find traditional financing in traditional places, like banks and credit unions. You can find some traditional financing options online as well.

TIPS FOR FINANCING THE FLIP

• Have confidence during negotiations. Find out ahead of time how much other flippers typically pay, and be prepared to walk away — you’ll find another lender
• Vet hard money lenders with other flippers, and ask for references
• For private loans, make sure you have legally binding paperwork and that the lender is accredited
• Get involved in local real estate groups. Networking is the key to building your financing options

Michael started B.E. Lending in 2015, bringing over 13 years of fund management, lending, and real estate sales experience to the company. He is a graduate of ASU’s W.P. Carey School of Business and a member of the Camelback Society. Prior to B.E. Lending, Michael helped grow Trinan Finance, a commercial finance company in Scottsdale, and later operated BMC Capital’s Phoenix branch, a nationally recognized commercial lender. During the recession, Michael and his team evaluated over 5,000 distressed properties throughout Arizona. Michael’s background is multifaceted and includes real estate brokerage, property management, commercial finance, and bridge lending.