Conditions are heating up for fix and flip real estate deals
The fix and flip entrepreneur is the poor man’s Donald Trump. The recipe is simple: take a recession, moderate to severe will do; mix in the inevitable foreclosures, add a dash of economic recovery, and you’ve got Fix and Flip Stew. Serve it hot, because the boom doesn’t last forever.
All over Colorado, at least from the Front Range west to the Utah border, the residential housing markets are heating up, and even reaching hot in the lower price ranges in some areas.
What makes this segment of the housing market viable is the availability of financing. Banks like it because it’s short term, and individual loan amounts are small, so they can spread the risk. On the other hand, if extensive remodeling is involved, current regulations compel banks to administer the fix and flip deals just like a million dollar construction loan, so the cost-benefit sometimes isn’t there for a $50 to $75,000 deal.
Small insurance companies, which are state, not federally regulated, can be much more flexible, and there are a couple in the state that are aggressively looking for these loans.
The hard money people love fix and flip. And the borrowers, while not particularly enamored of 10 percent and four points on the front end, are taking the money. It makes sense when they do the math:
Unfortunately for the kneecappers, they’ve got some mom and pop competition out there that’s surprisingly robust. The typical fix and flip deal is small enough to be a perfect size for nest egg Keoghs and self-directed IRAs. And, just like the institutional lenders, these individuals like the short-term nature of the loans.
But, as with any boom, there are a lot of prospectors panning for gold. We hear of instances in which investors have a good chunk of cash and financing all lined up for the rest of the purchase who have made full price offers, only to be outbid.
And, even though there’s still a sizable inventory of foreclosed properties, it’s shrinking fast in the fix and flip price range. Cash is king; even if a buyer has a 50 percent down payment, any loan, private or institutional, takes time to close, and the latter can take a lot of time.
Ideally, if you’re itching to get in on the stampede, have the cash to cut an instant deal. Lacking that, go to your bank. If that source can’t do the deal you need, the loan officer should refer you to either a mortgage broker that specializes in nonconforming real estate lending, or a direct private money lender.
Or, maybe you can go to First National Bank of Family for the dough you need.
Pat Dalrymple is a valley native. He’s been in the mortgage and banking business since 1961. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.
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