Why Hard Money Lenders Tend to Shy Away from House Flipping

Why Hard Money Lenders Tend to Shy Away from House Flipping

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House flipping was all the rage in the aftermath of the 2008 housing crash. Flippers discovered they could purchase distressed homes at deeply discounted prices, then rehab them and sell them for a lot more. Back then, hard money lenders funded more than one house flipping operation. That has since changed. Hard money lenders now tend to shy away from house flipping.

It is not that there is anything wrong with making money that way. Even though house flipping isn’t nearly as common as it once was, people still make a good return doing it. But these days, lending to house flippers just doesn’t generate the return it once did. As far as lenders are concerned, the lower return doesn’t justify the risk involved.

Current- and Post-Repair Value

A house flipper has to consider two separate values when buying a new property. First is the current value. That is essentially how much they are willing to pay for the property in its current condition. After repair value (ARV) is the value of the property after rehab is complete. Bridging the two values is the amount of money it will cost to rehab the property.

Companies like Salt Lake City-based Actium Partners look at the same two values when funding commercial real estate investments. They know that if ARV exceeds total purchase and rehab costs, making a loan is probably a good deal. So why doesn’t the same apply to house flipping?

Technically, it does. The problem is that the difference between ARV and the combined costs of purchasing and rehabbing are not as great in a flipping scenario. As such, the cushion for profitability isn’t as great either. That says to hard money lenders that the return doesn’t justify the risk.

Flipping Is All About Timing

The other big thing to consider is that house flipping is all about timing. An investor might want to purchase a distressed property and turn it around for sale within two months. Depending on the current state of the real estate market, two months might be a drop in the bucket. Then again, two months is far too long in an unstable market.

Residential home prices fluctuate too quickly based on supply and demand. Thus, making money as a house flipper requires impeccable timing. You have to know when to buy and when to sell. You have to be able to predict, with a fair degree of accuracy, when a distressed property has the potential to generate a significant return.

Once again, success is possible. To this day there are professional house flippers who make a very comfortable living. But the risk of poor timing is too much for some hard money lenders to accept. They would rather stick with long-term commercial real estate deals, real estate deals that offer more stability and the promise of a greater return.

The Bridge Loan Possibility

One way to get around hard money concerns is to go the bridge loan route. Rather than asking a hard money lender to assume the risk of a standard loan, ask for a bridge loan instead. A bridge loan can facilitate quickly closing an attractive deal without having to jump through bank hoops. After closing, you can arrange for traditional financing to pay off the bridge loan.

House flipping is still a viable way to make money if you know what you are doing. Overall, real estate is a very good investment option. Making it work takes knowledge, skill, hard work, and strong funding sources. Just know that hard money is not always an option, especially for house flippers.

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