How to Finance Flipping a House

Since flipping houses became a hot trend over the last nine years, buying distressed homes, fixing them up and selling them for profit has continued to bolster the real estate industry and the economy.

“There is a steady flow of foreclosures available for flipping, and the practice can be quite lucrative,” says Kurt De Meire, CEO of CountyRecordsResearch.com in Huntington Beach, California. “In California alone, at least 100 properties start foreclosure proceedings daily.”

There is a steady flow of foreclosures available for flipping, and the practice can be quite lucrative. In California alone, at least 100 properties start foreclosure proceedings daily.
Kurt De Meire, CEO of CountyRecordsResearch.com

Kurt_DeMeireWhen it comes to financing for flipping houses, De Meire has used just about every financing avenue available. “There are many ways to acquire and finance property. Don’t limit yourself to the traditional loans for flipping houses. I’ve done it all.”

De Meire’s company operates in California, Arizona, and Nevada and for 27 years has tracked and reported on foreclosures, including defaults, trustee sales and REOs (repossessed property by banks and lenders). The company also processes foreclosures for lenders.

De Meire’s website updates every 15 minutes, giving those who subscribe to his service real-time information on houses that are available for purchase and could be flipped. He also teaches investors how to buy foreclosures, which he says 99 percent of the time buyers purchase for flipping.

If the idea of making money flipping houses interests you, read on for cost-effective ways to get the financing you need.

Methods of buying foreclosed property

There are four main ways to buy foreclosed property. The method you use to buy the property will affect how you finance it.

1. Approach the owner during the default period

The most common way to buy property for flipping is to approach the owner during the three-month default period that occurs after the the lender files the default. During this time, the owner has the option to sell the property or pay the loan to make it current.

If there is equity in the home you buy during the default period, it’s usually a good idea to take over ownership subject to existing financing. This means that you pay all the delinquent mortgage payments and take over the existing mortgage. You also buy the seller out with an agreed upon price.

For example:

For a house worth $500,000 that has a first mortgage of $300,000, De Meire suggests offering the owner $20,000. You must also bring the mortgage current by paying the delinquent amount due, which is $30,000, for purposes of this example. This leaves you with mortgage payments for the $300,000 while you renovate the property for sale. If you’re able to flip the property and sell it for $500,000, you’ll make nearly $150,000.

If there’s no equity in the home and there are multiple loans, offer the owner a short sale proposal, which is an offer equal to less than what is owed on the property.

For example:

For a house worth $500,000 that has an upside down loan of $600,000, approach the owner with a short sale proposal of $400,000 for the property, contingent on the lender’s approval. “This requires the lender to cooperate and accept less than is owed on the loan, which is the definition of a short sale,” says De Meire.

With this scenario, you will want to get funding for the $400,000, which if approved will result in you owning a home with $100,000 in equity.

2. Bid at foreclosure trustee sales

At the end of the three-month default period, if the owner hasn’t sold the house, the property is auctioned at a public trustee sale, which is open to the public. A major advantage of buying a home at a trustee sale is that any loans that are “junior” to the “senior” loans, such as second and third loans, are wiped out. This decreases what is owed on the home.

For example:

Sometimes the lender that forecloses on the loan is a second, third or fourth loan and not the first. That means that at the trustee sale, you would have to pay off that second, third or fourth loan to purchase the property. If it is the second loan you pay off, the third and fourth loans are erased, and so forth.

De Meire describes how this works with a personal example:

“I paid $160,000 cash at a trustee sale for a waterfront property in an exclusive community. The money I paid was for the second loan on the house, which was the loan that went into foreclosure. I took the title of the existing first loan of $500,000, and the third and fourth loans were wiped out. After I had fixed the place up, I sold it for $840,000.”

3. Repossessed property sales (REO)

About 50 percent of homes up for sale at trustee sales have no bidders, says De Meire. Those homes remain the property of the foreclosing lenders. When this occurs, De Meire suggests offering to buy the home at a reduced rate.

For example:

If the home is worth $500,000, but the foreclosing lender still owns it with a loan of $600,000, offer the lender $400,000 before they incur any costs to clean up and repair the property for sale. You pay for the property by getting a mortgage from an outside source or with seller carryback financing, which refers to getting a loan from the foreclosing lender.

4. Approach buyers at trustee sales

Individuals who attend trustee sales are there to buy property to sell. You can speed up this process for them by offering to buy the property they’ve just bought. The buyers have to use cash for the sale, but you can get financing to buy the property from them.

For example:

If at a trustee sale an attendee bought a house worth $500,000 for $350,000 cash, you could offer him or her $400,000. The buyer makes a quick $50,000, and you have a house that is worth $100,000 more than you paid for it. You would finance the $400,000 loan with a traditional or online mortgage.

Top financing for flipping houses

If you don’t have enough cash for flipping houses, you’ll need to secure financing. Here are the top sources to consider:

Bank

Getting a bank loan for flipping a house is the same as getting a traditional mortgage. You invest the appropriate down payment and decide on the length of the loan. The bank pays for the property, and you pay the mortgage until you flip the house.

You will need:

  • Good credit of +670
  • Low debt-to-income ratio
  • A good track record of flipping houses. (If you’re just starting the house flipping venture and have no experience, you may have difficulty getting a traditional bank loan.)

Online mortgage lender

An often easier and much faster way to get a mortgage loan is through an online home loan lender. Sometimes referred to as a hard money loan, this type of financing is secured by the property itself and can be a good option if your credit score is lower than 670. Some online mortgage companies offer 15- and 30-year fixed loans, while others are more focused on short-term loans designed for fixing and flipping. Short-term loans tend to have higher interest rates.

Keep in mind:

  • The property must appraise at the purchase price or higher.
  • The lower your credit score, the higher the interest rate will be.

Home equity line of credit (HELOC)

If you own a home and have some equity, tapping that equity can be a good source of financing for flipping houses. Home equity lines of credit generally come with variable interest rates, but this usually isn’t an issue if you fix and flip the house within a few months and use the profits to pay off the HELOC. Having a line of credit available is also convenient if you plan to flip houses on a regular basis.

Keep in mind that a HELOC is a second mortgage. If you are unable to make payments, you risk losing your home. More about HELOCs here.

You will need:

  • Equity in your home
  • Good credit of +670
  • Low debt-to-income ratio

Flipping houses can be lucrative when you understand the various ways to finance them. SuperMoney offers a convenient way to compare lenders and products. Click here to read expert reviews and user comments on leading mortgage lenders.