Fix-n-Flips and Creative Finance 101

In today's real estate investment market many serious investors face the challenge of financing a typical fix-n-flip property. Typically, these challenges are overcome by the creative forces of real estate financing. Often times referred to as "hard money lenders," financiers are usually the way to go when traditional mortgage approaches can't get the job done.

The first question asked is how can these entities approve my loan when other mainstream sources (mortgage broker, bank, etc.) flat out refuse to help me? Well, the answer isn't simple, but for starters creative financiers see your problem as an opportunity. Creative financiers look for all the upside you possess as a borrower, like great assets and a project that has solid market merit. 

So, how can a mortgage source loan money so quickly? The answer usually begins with pitching the finance company on what the deal is. What is the upside, the price, the market conditions, anything that brings factual relevance to the picture is critical.

Why can a creative finance company close a deal faster than traditional sources? The creative financier typically has large sums of personal and private funds available. If the situation requires a fast turn around, the speed of such transactions is quick because the traditional practices of loan approval doesn't always apply. Instead of having underwriters that can slow down a loan process, the underwriting of the loan is done by a team of professionals that know how to smell out a bad deal from a good one.

So, what if my credit is in bad shape can I still get a creative finance loan? Honestly, it depends on the company's requirements, but typically, if an individual has bad credit but good personal assets, cash or real estate holdings and steady income a creative finance company will have an interest in financing your projects.

In numerous situations, I have seen a person with lousy credit and even a recent bankruptcy get a loan for such a deal. The bottom line is do you have a solid deal that makes real sense, with assets to secure your loan? If the answer is yes, then you have probably discovered a new option for financing.


Final Considerations
One of the latest trends in creative finance is that the lender will create a joint venture with the borrower. By doing so, the lender shares in the end profits of the project, but the lender also may be willing to finance the project at a 100% of the cost plus remodeling or development costs to get the project completed quickly.

In creative finance programs, you should expect to pay 3 - 6 points and an interest rate of 10 - 15%. Additionally, if the lender loans you a 100% of the property's purchase price and all fix-ups you may be looking at a profit share of 50% to you and 50% to the investor. Some people say "why would I ever do that type of loan?" The answer is fairly simple. If the deal is good then making half of the profit is better than making nothing at all.

If you are an investor low on cash but rich with opportunities, this option may well be the perfect answer.