Author: Elise Loan Tucson

Fix-n-Flip Financing Explained

Being a real estate investor (or a real estate agent working with one) is not for everyone, that’s for sure.  However, one of the reasons people don’t dive into the real estate investing pool is they don’t understand how the deals are financed.  Let me give you a quick breakdown of how some fix-and-flip deals are financed.

Step one:  You take the acquisition price – example: $200,000; you’ll need to put down 10% – in this example: $20,000.

Step two:  Determine how much will be needed in repair costs to get the home ready for appraisal and sale – example: $35,000.

Step three: The acquisition price was $200,000 with $20,000 down, so $180,000 will be needed for the home acquisition, and $35,000 will be needed for the repairs.  Added together, that’s $215,000 needed from a lender.

Step four:  Determine the home’s After Repair Value (ARV) – example: $375,000.  The lender will lend up to 65% of the ARV – example: $375,000 X 65% = $243,750.  Because 65% of the ARV is higher than $215,000 (the acquisition and repair costs), all’s well.

Step 5:  The “flipper” (borrower) will be required to put together a precise list of what improvements are to be made to the home calling out specific materials.  An appraiser will be called in to compare the current state of the home to the repair schedule to determine what the ARV will be.  If it comes back higher than previously thought, great.  If it comes back lower, it may require the buyer to bring more money to the table – example: the home’s ARV is set at $320,000 (65% of that is $208,000, and $215,000 is needed – the borrower would have to come up with an additional $7,000 over and above the $10,000 they brought in for the down payment).

Step six:  Once the ARV is established, the lender moves forward with finalizing the loan and financing the project.  The terms will usually be 12 months with interest only being charged.  Example: on a $215,000 loan at 9.5% interest only, that would be a monthly payment of $1702.08.  The lender is going to charge fees up front that usually add up to about 4-5% of the loan amount.  That amount will be paid at closing along with any closing costs (about 2.5% of the loan amount).

So, let’s put this in real numbers and see how much a flipper would make:

$20,000 for down payment

$15,050 for fees and closing costs (about 7% of the loan amount)

$20,425 (12 months of interest)



$375,000 house sells for this amount

$215,000 amount financed



$160,000 total cleared from sale

-$ 55,475 total costs

$104,525 PROFIT

That number just north of $100K isn’t the TRUE profit because you have short-term capital gains taxes to consider, but this gives you a general idea of how such a fix-and-flip project is financed and how all the numbers are calculated.

This is just one of many different ways to finance a fix-and-flip.  We also have other strategies that appeal to a “flipper” mentality but allow the flipper to avoid those short-term capital gains taxes.  And for those who are leaning more toward the buy-and-hold strategy, we have ways to help them acquire properties without the need for income verification.

As an agent, by having a passing knowledge of what your lending partner can do to help finance these types of deals, you become an asset to your existing customers who are in the investor pool with both feet and to those who are nervously perched at the edge unsure of whether they should dip their toe in the water to see how it feels.  Give them a splash of your insights, and you’ll be pleasantly surprised at who jumps in!

Creating v. Competing

In the not-too-distant past, marketing and advertising were costly and, quite often, labor intensive (which means “costly”).  With social media being readily available and free to everyone, that significantly evened the score for everyone involved.  So, instead of having a handful of players who have the money and means to go after a target audience, we now have everybody and their dogs (and cats) going after that same target audience.  In other words, the lake remained the same size, but now we’re cheek by jowl full of people casting in their lines and nets to catch a fish.

That doesn’t mean that when Kyle posts “hey, if you know someone who is looking to buy or sell a house, let me know” it’s equally effective and persuasive as when Karen creates a multi-media ad featuring pretty people and flashy graphics, but it does mean that both of them are waiting for someone to come to them.  In light of this, I recently taught a class to some real estate agents on different ways to create customers rather than marketing to buyers and hoping the buyer will call or email them.

I’m not going to go over the different items we covered (I’m not bitter) mainly because it was a lot of back-and-forth discussion and brainstorming.  What I will say, though, is that each and every idea we discussed boiled down to agents and lenders LITERALLY working together to CREATE customers.  This doesn’t mean Lender A buys a bunch of leads and sends them over to Realtor B to cull through them and see if any of them are any good.  Nor does it mean that Realtor A is going to send out a mailer with Lender B paying for half the costs.

Near the end of our discussion, one of the agents in the class asked that I create a very simple chart that outlined the P&I payment for a certain loan amount in relation to a particular interest rate.  For those of you who just rolled their eyes after reading that last sentence, I will agree that such a chart already exists, isn’t that hard to get, and isn’t all that sexy or persuasive.  But I will tell you this: it fit perfectly into a plan we had come up with together that will CREATE customers rather than market to people who are already on the hunt for a home (and who every other agent and their menagerie of pets are also trying to attract).

For grins and giggles, I’m including that non-sexy chart.  Give me a call if you want me include your branding on that chart or if you want me to schedule a time to sit down with you and a handful of your fellow agents and go over this brainstorming session on how to create customers.  I’m here to help!

A VA Loan Myth Dispelled

VA Loan Info with Priority Lending Mortgage

Recently, I had the pleasure of meeting with a person who is relatively new to being a real estate agent but not new to selling a house.  Our conversation turned to the subject of her own home that she and her husband were about to put on the market.  She wanted to know what mortgage options were available to potential buyers since her home will be listed for approximately $550,000.  FHA, obviously, wouldn’t be an option because the loan amount caps out significantly further south than $550,000 – she knew that.  But what about VA?  She started to say that she knew the cap on a VA loan, while not as low as FHA, was still not high enough to enable someone to purchase her home using that option.  Not true – not entirely.

One of the great benefits of a VA loan is the fact the buyer isn’t required to put any money down.  But like many benefits, there’s a limit.  In the case of a VA loan, that limit is $484,350 (unless the house is in a high-cost area).  Patriotism aside, a difference of $65,650 between the limit and the asking price in my new agent friend’s case is a tad beyond negotiation.  In this case, a VA loan is still a very viable option, and I urged my new friend that she should indicate in her listing that she accepts VA loan offers.  Unlike unicorns and politicians who don’t have an ego, there IS such a thing as a VA Jumbo Loan – no myth!

Caps when dealing with VA Loans

While there’s a cap of $484,350, that cap applies to the amount up to which the borrower will not be required to come in with a down payment.  With a VA Jumbo Loan, though, the borrower is only required to bring in 25% of the DIFFERENCE between the loan limit and the purchase price.  In my friend’s case, that difference is $65,650.  That means a VA borrower could purchase her home with a down payment of ONLY $16,412.50.  Yes, you read that correctly: for less than 3% of the purchase price, a VA borrower could use their benefit and purchase that house.

On my friend’s listing, it’s absolutely imperative that she indicate that VA loan offers are accepted, the main reason being that more than the majority of agents are like she was before our meeting and don’t believe it’s even an option.  I didn’t get a finance degree from Harvard (although I did buy a t-shirt there once), but I’m fairly certain that increasing the number of potential buyers for your property is a good thing.

For more information feel free to contact Priority Lending LLC today.

Offense Doesn’t Need to be Offensive

American Football, Running Back, Football Player anology for credit

For numerous reasons, when I’m in the middle of taking a mortgage application, and I ask the borrower for her/his social security number, I often get these responses:

“Do you really need to pull my credit?”

“Can we wait to pull my credit until . . . ?”

“I’m not comfortable giving that to you.”

They don’t flinch when I ask them how much money they make or what they have in the way of monthly debts, but when I ask for their social, you’d think I was asking for intimate measurements or nuclear launch codes.  They forget that they came to me (I wasn’t standing on the street corner soliciting) in search of the amount for which they can qualify.

In today’s environment, though, many of us as agents and originators are actively soliciting people’s business – we’re not just waiting for our phones to ring or our inboxes to fill.  Because of this go-on-the-offense behavior, we want to be very careful that we’re not being lumped in with Zillow and other marketing monsters who are just looking to grow a database that can be sold or leveraged.

To that end, we’ve come up with a new way to help buyers pull credit without having to share their social security number OR their birth date – and it’s a soft pull, which means it has NO EFFECT on their current scores.  When you as an agent come across a buyer who is reluctant to have her/his credit pulled, sometimes you’re sitting precariously on the horns of a dilemma because you don’t want to show them houses until they know what they’re qualified to purchase, but you don’t want to let them go and get scooped up by another agent.  Because of that, we give you this service to keep in your back pocket and keep them in your sphere.

This is the essence of 21st-century customer service: protecting your clients’ privacy while providing you with value.  Give us a call so we can show you how this is done – you’ll be glad you did.

Credit: Crush or Be Crushed

Credit info with Proritiy Lending LLC

Often, when someone has clawed and dug their way out of debt, they destroy their credit cards and cancel their accounts.  Many do this because they blame the credit cards and look at them as plague-carrying rats.  In other words, they fail to acknowledge that the credit card is an inanimate object which has absolutely no power to make them do anything – instead, they use them as the scapegoat and have learned little from their experience except how much it stinks to be in debt.

Admittedly, there are those who destroy their cards and cancel their accounts because they absolutely HAVE TO remove any and all temptation to assure they never go back down that rabbit hole.  They recognize they just don’t have the willpower, and you have to respect that.

Whatever motivates a person to want to take these extreme steps, canceling their credit cards is the absolutely worst thing they can do in the long run.  To understand the impact of canceling a credit card on your credit score, you need to understand how that number is derived. There are five factors that go into calculating your credit score.

Calculating your credit score

  1. Payment history
  2. Credit utilization
  3. Length of credit history
  4. New accounts
  5. Credit mix

Of these factors, your payment history carries the most weight in determining your score, followed by credit utilization and then the length of your credit history. New accounts and your credit mix (having a mix of loans, credit cards, mortgages etc.) carry the least weight.

Canceling a credit card, obviously, directly affects payment history, credit utilization, and length of credit history – in other words, canceling a credit card completely nullifies the first two and it puts an end to the last one.

Your credit utilization is a measure of your debt against your available credit and, ideally, it should be kept at 30% or less. If your utilization exceeds that threshold, your score could take a hit. Therefore, if you have a total line of credit worth $10,000, you should make it a point to never carry more than $3,000 in balances at once.

If the temptation to go on a shopping spree with a newly zeroed-out credit card is far too strong, let me make a suggestion: take a look at your monthly bills (utilities, insurance, cell phone, etc.) and choose the ones that don’t vary too wildly and total less than 30% of your available credit.  Put those bills on autopay with your credit card and pay that ONE bill in full each month when it arrives; then take that card, fill a Ziploc bag with water, place your credit card inside the bag, and chuck it all into the freezer . . . but don’t cancel the account.  If you feel the “need” to use that card, the time it will take to chisel away the ice or have it thaw SHOULD be enough of a deterrent.  You think I’m kidding, don’t you?  I’m not.

Keeping that credit card open, used, and paid off each month will do wonders for your credit score.  Conversely, canceling that card will stall any efforts to improve your score.  The old saying of “credit never sleeps” is true, and many have learned it means how debt and its interest are unrelenting, but with today’s article, we should take it to mean that it never stops HELPING us improve our credit scores if we control it.