The fix-and-flip strategy is no doubt lucrative and the most common way of building wealth within a short period in real estate. Like other businesses, things do go wrong. But when things go wrong, what should you do?
Here are a few options you can consider.
1. When Financing Fails
Like the popular saying, “Money makes the world go around.” In real estate, especially the fix-and-flip strategy, money also makes home flipping go around successfully. As an investor, you need to seek financing from mortgage lending firms—banks, hard money lenders, private money lenders, etc. If your popular means of getting funds fail, what would you do? Here are alternative financing options you can fall back to.
i. Fix-and-flip cash-out Refinance
Cash-out refinance is a financing option that allows fix-and-flip investors to refinance an existing property to pay for a new investment property. This strategy allows investors to extract equity from an existing property by applying for a new loan using the property as collateral. The rule guiding this financing option is that: you must pay off the original mortgage before you are allowed to use the remainder for whatever you want. This means that you are only allowed to use the balance of equity (the difference between the new loan and the amount of the old mortgage) to finance your investment.
ii. Home Equity Line of Credit (HELOC)
Another alternative funding option for fix-and-flip investors is the Home Equity Line of Credit (HELOC). As its name implies, HELOC is a financing option that issues an investor a line of credit based on the value of their primary residence. Unlike the cash-out refinance, HELOC can serve as both first and second lien (it can be taken in addition to an existing loan) and there is no restriction on what an investor can use the funds received for.
iii. Bridge Loan
A bridge loan is a temporary financing option used to cover the time between two real estate transactions. This financing option can be used as a backup when your original means of getting funds fail. Unlike the private or hard money loan, the bridge loan is suitable for an investor who finds a suitable investment deal that may be gone by the time funds is available. It is a short term loan that can last from two weeks to a year.
iv. Find a Partner
Another method of getting funding when your original means fails is by entering a partnership with a friend, family member, or fellow investor. Since there is no such rule that prevents you from doing it with someone else, why don’t you find a trusted individual that will be by your side throughout the deal? Find someone interested in the deal, sign an agreement and make a successful deal together.
2. When you can’t find a buyer
You buy a property; you fix it but you can’t find an interested buyer. It is important to understand that things go wrong and when the unthinkable happens, what should you do?
Here are some alternative things you can do when the market is bad.
i. Lower the Price
The first thing that comes to mind when things go wrong is to lower the selling price to attract buyers. Be advised that lowering the selling price needs to follow some procedures. As an investor, you don’t just lower the price. You need to adjust the prices based on the bottom line of the property.
ii. Lease Options (Rent-to-Own)
This strategy involves leasing the property to a ‘would-be’ buyer who also doesn’t have the financing to buy the property straight out. This strategy means you rent the property out to sell it to the tenant. To qualify for a lease option, the tenant needs to put down a deposit that would serve as the down payment and the subsequent monthly payment would secure their right to buy the property at some agreed date.
iii. Rent it out
Since the central aim of selling is not to default and to make a profit, the rental strategy can also serve as an alternative to the fix and flip strategy. Instead of being discouraged, rent out the property and continue to receive monthly income until the market returns to a normal level when you can decide what to do with the property.
The fix-and-flip strategy is lucrative but that does not mean things don’t go wrong. When things go wrong with your fix and flip, try out the alternative means provided above and learn from the failed deals.