House flippers tend to finance their operations through a combination of bank loans and hard money. Credit cards can also be helpful for financing renovations. Needless to say that a flipper’s ability to borrow is critical to his success. His ability to borrow hard money might be the most critical element of all.
The thing about hard money is that lenders are not always willing to get on board. Some lenders, like Salt Lake City’s Actium Partners, will not go near house flips under any circumstances. Among those that will, there are those lenders that tend to be extremely fussy about the projects they invest in.
Given that nearly all hard money loans tend to be more risky by default, you might wonder why lenders shy away from house flips. There are a number of reasons, but they all converge at a single point for lenders: resale.
No Interest in Being Landlords
Actium Partners points out that hard money lenders have no interest in being landlords. They also have no interest in acquiring the properties their clients offer as collateral. They just want to earn their money on interest and go their way. So with every project, they need to consider resale value.
Real estate has historically been a sound investment. That said, it is generally considered a long-term investment. You buy property and hold on to it for years at a time. Time is where the real value is. But think about it, time is something house flippers have very little of.
Making money by flipping houses requires speed. Flippers cannot afford to tie up their cash for very long. They need to buy a house, get it renovated, and get it back on the market as quickly as possible. They also need to price their properties for quick sale.
The Market Is Too Volatile
Timing is everything to a house flipper. For example, an investor might buy a typical fixer-upper for $50,000 in a market that would support a $150,000 asking price after renovations. But what if renovations that should have been completed in three months end up taking six months? Where will the housing market be at that time?
The residential market is too volatile from one season to the next despite being stable in the long run. Over many years, residential property values tend to rise considerably. But there are no guarantees year-to-year. There are no guarantees between seasons in the same year.
A lender willing to finance flipping projects is taking a chance with every project funded. The one saving grace is that hard money loans are short-term loans with higher interest rates. So when projects do turn out well, lenders stand to make good money. They also stand to lose when the market isn’t as favorable.
LTVs Are a Question
Another factor that gives hard money lenders pause is loan-to-value (LTV) ratios. Hard money lenders almost always set LTVs lower than more traditional lenders for the simple fact that they are making more risky loans. In a house flipping scenario, the potential value of a property being acquired may not be enough to support a lender’s minimum LTV. That automatically puts a potential loan in jeopardy.
No doubt there are some hard money lenders more than happy to fund house flipping projects. In fact, some even specialize in it. But other hard money lenders will not go near a house flip for any reason. They just find the whole proposition too risky. When that’s the case, flippers need to approach other hard money lenders or look for more traditional sources of funding.
