Your average house flipper has a box full of tools. From hammers and saws to screwdrivers and tape measures, the tools of the trade enable house flippers to make money. But there is one tool that will not fit in any toolbox. It cannot be held in your hand either. What is it? The bridge loan.
A bridge loan is a type of business loan that real estate investors often use to purchase new properties. For example, Actium Partners is a Salt Lake City, Utah hard money lender that provides bridge loans to commercial real estate investors. They don’t do house flipping loans, but the same general principles would apply if they did.
How Bridge Loans Work
Actium explains that a bridge loan is a loan intended to bridge the gap between immediate funding needs and future income. The immediate needs of your average house flipper are a combination of purchasing new properties and paying to renovate them. Future income is based on selling a renovated property at a profit.
Bridge funding can mean the difference between completing a purchase and watching a property go to someone else. Paying in cash usually allows house flippers to get a better deal as well. That is critical to maximizing margins in the flipping business.
As for lenders, they base approval on the current value of the property in question combined with its after repair value (ARV). As long as the lender believes the potential equity is enough to limit risk, approval is likely. The borrower will normally have up to a year to sell the renovated home and repay the loan.
House Flippers and the Need for Speed
So, what makes bridge loans from private lenders so attractive to house flippers? In a word, speed. House flipping is a business that moves at an incredibly fast pace. You cannot make money if you are sitting around waiting for banks to make loan approval decisions.
Imagine an established flipper looking at the latest batch of foreclosures, short sales, and auction properties. He sees an incredibly attractive property he believes he can flip in 30 days and at his desired margin. If he can do it, so can every other local house flipper. They are all going to want that house.
In cases like these, the flipper who moves the quickest generally wins. This is why house flippers do not like dealing with banks. It could take a bank several days to approve bridge financing. It could take several more weeks before the loan is actually funded.
On the other hand, a private lender specializing in hard money can generally approve bridge financing within a day. Once approved, the loan can be funded in as little as 24 hours. That is exactly what a house flipper needs – easy access to fast cash. It is the stuff great real estate deals are made of.
Get in and out Fast
At the end of the day, house flipping is a business that requires you to get in and out fast. Why? Because you are buying properties that are priced based on current market value. You are buying with the expectation of making renovations and selling for profit. But there is a problem: the real estate market changes very quickly. That’s why you cannot afford to hang on to a house for 6 to 12 months.
No, you have to be ready to sell in 3 to 6 months. If you cannot turn houses that quickly, you risk losing your shirt. This is exactly why bridge loans from private lenders are such a favored tool among house flippers.