The Popularity of Fix-and-Flip Loans Is on the Rise
Flipping houses has now become a cultural trend, and fix-and-flip loans are on the rise, creating new opportunities for brokers.
One of the most popular shows on HGTV is “Flip or Flop,” in which hosts Tarek and Christina El Moussa purchase old or neglected properties — sometimes sight unseen — and then renovate and flip them for resale. Viewers are hooked into the drama from the purchase to the rigorous renovations, showings and, of course, sales.
Similarly, “Flip This House” on A&E Network spotlights the purchase and renovation of a single unit. Each episode details the listing price, purchase price, the cost of renovation, and the market value (including profit) of the property that has been fixed and flipped.
No one claims that fix-and-flips are easy. While the conflict and solution generally come in an hour’s time on television, the reality is that flipping houses is serious work and requires a lot of capital to take advantage of market opportunities. Costs include the downpayment on the property, the renovation costs, insurance, permits and fees, and more. Once the renovation and sale are completed, the seller is responsible for recording fees, title search fees, escrow fees, and other costs.
Fix-and-Flip Loans Are a Rising Trend
According to new research from ATTOM Data Solutions’ 2017 Home Flipping Report, house flipping in the U.S. increased to an 11-year high in 2017, creating an excellent opportunity for brokers who offer fix-and-flip mortgages. In fact, for the second year in a row, more than 200,000 homes were flipped. And the trend has gone national. Pennsylvania was the state with the highest gross ROI (108.3%) with a tidy $78,000 gross profit on each. Ohio, Louisiana, Maryland, and Illinois rounded out the top five states.
How Can Brokers Profit from Fix-and-Flip Loans?
Investors seeking capital to purchase, restore and sell investment properties often turn to non-bank sources for fix-and-flip loans because they lack a consistent source of income to qualify for a traditional bank loan. Brokers sometimes turn down these opportunities because they don’t understand the options available for servicing borrowers who are hard to qualify.
Traditional, owner-occupied residential property mortgages are focused on the buyer’s personal income and credit to meet the strict guidelines established by government service agencies like Fannie May and Freddie Mac. However, mortgages for residential investment properties are often asset-based, meaning their focus is on the value of the property and its revenue-generating potential. Because of this, the use of asset-based lending solutions allows brokers to qualify self-employed flippers who may not qualify for a traditional mortgage.
Asset-based lenders are also willing to fund fix-and-flip projects that traditional banks won’t touch, including the cost of renovations, through short-term loans based on the property’s “as repaired value” or ARV. Such financing is the key to winning the business of fix-and-flip investors.
Mortgage brokers who both understand and know how to use asset-based mortgage solutions can take advantage of cultural trends that are currently driving the real estate investment market.