The past decade has seen rollercoaster-like plunges and rises in the real estate market, offering both high risk and high reward to those buying or selling homes. For the average person, these changes may simply affect the price of a primary residence. However, for the house flipper, opportunities to turn purchased property into income are everywhere.
The National Association of Realtors reports that existing homes are seeing increased sales—to the tune of a 6.1 percent rise in the last month. This growth trend brings sales of homes to an 18 month high. For those hoping to appeal to prospective buyers, the recent increase signals good tidings. Some regions of the U.S. show many in real estate jumping at the chance to offer renovated homes for sale.
California, specifically, remains a state displaying positive trends for people with houses for sale. The number of houses on the market dropped in the month of March. A reduction in supply has given sellers the upper hand, especially in areas like San Diego, where houses are being purchased by homebuyers willing to consider near asking price.
A Tantalizing Prospect for Those Working in Real Estate
The broader West Coast region boasts a similar change for real estate investors. People contemplating buying homes and properties other than their primary residence are looking more toward flipping than renting those secondary properties.
A poll by Auction.com shows 75 percent of real estate investors in California and Washington prefer flipping homes, whereas only 24 percent would rather rent out their properties.
Redfin reports that approximately 3 out of 4 houses on the market are so-called ‘stale’ homes—houses that have been on the market for weeks, but largely disregarded by prospective buyers. With the housing market beleaguered by these uninteresting properties, it’s no wonder investors are turning to house flipping in order to offer attractive, renovated homes that catch the eye of buyers.
Alternative Financing Offers New Possibilities
No one who has followed the news during the past decade could have missed the overhaul of the financial industry. Mammoth financial organizations requiring government bailouts has had a ripple effect on the old status quo for lending. It used to be that banks were more lenient and open to investors seeking to flip a property, but those days appear to be gone.
In one example, a 33-year-old named Ben Walhood used to flip properties on the side. Since he had a job and only invested in real estate part-time, his income meant that banks would, with little resistance, give him a mortgage for the purposes of flipping a house. He finally decided to go into real estate full-time, but then he found that the same banks once gladly lending to him were now suddenly unwilling to finance his new business.
Difficulties inherent to an FHA-backed (Federal Housing Association) loan often plague investors seeking a relatively obstacle-free and quick turnaround on their renovation. A home bought, renovated, and resold in under 90 days from its initial acquisition date most often does not fit within the requirements of an FHA mortgage (though there are some exceptions).
If a home flipper sells his or her renovation project after 90 days of acquiring the property, but before 180 days have passed, a second appraisal is required. This second evaluation applies in cases where the renovated property will be resold for more than its purchase price.
For many investors, an additional appraisal is just another unwanted cost in the mountain of expenses for renovating a home. Any flipper seeking to make a profit is careful to avoid unnecessary costs wherever possible, and the regulations forcing an unwanted appraisal fall well within that category.
Flippers like Walhood are being driven to come up with creative financing for their investments. One such alternative financing option is hard money lending.
Hard Money Lending for Fix-and-Flips
Hard money lending represents a faster method of lending than typical FHA loans or other soft money options. Oftentimes a hard money lender is one willing to finance projects through private money, rather than a large banking institution. This quicker method of funding an investment has its unique set of requirements.
Someone flipping a piece of property may use hard money lending if they cannot or do not want to go through the longer process of a typical loan. A hard money lender often requires higher interests rates and the use of collateral to secure their services, but for the investor desiring a speedy completion on their project, this avenue offers noteworthy benefits.
Reasons for using hard money lending include lack of capital, bad credit, or the need for a quick purchase. An investor who spots a great deal may use the hard money alternative funding to grab and flip an appealing property before someone else jumps at the opportunity.
For those making a quick turnaround on their investment, the benefits of hard money lending outweigh the drawbacks. And despite an ever fluctuating real estate market, opportunities continue to appear, and the avenues—hard money lending or otherwise—by which to make use of openings are increasing.
