If you are in the flipping game, you want a short-term loan with monthly payments, right? A 340 K loan for 14 percent interest, well that will cost you about 4 thousand in monthly interest payments alone. Who wants that kind of obligation for longer than say six months?
Say a rehab investors been in the business for a little under a year and while combing through the local listings he
spots a deal that is too good to pass up. The list price is 50 K and houses in the area usually go for 300. He doesn’t need a calculator to spot the potential.
At such a steep discount, the house is a wreck. Inspection reveals only the frame of the house is worthy of being salvaged. But our investor remembers from previous deals, “a short-term loan means greater profits,” and so sticking to his guns he takes out a six month 190 K loan at 11 percent with interest-only payments.
With his money in hand the work proceeds, rotten clapboard falls until the house is nothing but sticks. Then the floors removed, and he comes to find the house is tilting because the foundation has sunk. Our poor investor has to build a new house from scratch to rectify the issues with the foundation. Should take six months right? His contractor gives him no assurances.
But he has to see the project through because how else is he going to pay back that 190,000 if he doesn’t sell the house?
The clock ticks down, work continues at a furious pace, but six months is just not enough time. Our investor can only pray that his lender will understand his difficulties and give him a bit more time before asking him to pay back the remaining 190 K in principle.
What went wrong?
The investor was naive. First, he let numbers tell him to get in on the deal, the lure of 100s of thousands in potential profit blinded him to the scope of work involved. Because he underestimated the extent of work required, he assumed an interest only short term hard money loan was right for him.
He might have paid more for a long-term hard money deal, but he would have had two things that are invaluable in the case of difficult flips: time and flexibility. A long-term hard money deal might be more expensive on the surface, but it might give you the time you need to finish your project.
If you sense a property might need a lot of work, you don’t want to live under the threat of a looming balloon payment ready to pop at any moment.
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis Dahlberg Broker/RI/CEO
NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave | Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.