Fix and Flip Loans: Key Phrases to Understand

Bridge, Fix and Flip, and Hard Money Loans

 

All three of these terms can be used somewhat interchangeably to describe these types of loans. Within the context of our EasyFix loan program, you may hear any of these descriptors used - they all essentially mean the same thing. With that being said, it is important to know what bridge, fix and flip, and hard money all refer to when it comes to real estate investing.

 

 

Bridge Loans

 

A bridge loan is essentially a short-term financing solution that bridges a financial gap. In the context of real estate, bridge loans help investors acquire and rehabilitate properties while awaiting the sale or refinancing of those properties. They serve as a “bridge” to secure a property and prepare it for its next phase, whether that’s resale, rental, or refinancing.

 

 

Fix and Flip Loans

 

Fix and flip loans are short-term loans designed specifically for investors looking to buy, renovate, and quickly sell properties for a profit. Unlike traditional loans that rely heavily on creditworthiness and lengthy approval processes, hard money lenders focus on the property’s value and the investor’s experience. This asset-based approach allows experienced investors to access funds faster, giving them a competitive edge in the fast-paced world of fix and flip.

 

 

Hard Money Loans

 

Hard money loans in the context of real estate investing are short-term, asset-based loans typically provided by private investors or companies. These loans are often used by real estate investors who need quick access to financing for property purchases or renovations. Hard money loans are based on the value of the property being used as collateral rather than the borrower's creditworthiness. They typically have higher interest rates and shorter repayment terms, making them suitable for investors looking to secure properties quickly and then refinance or sell them in the near future.

 

 

Fix and Flip Loans: Key Metrics

 

The three most important metrics for fix and flip loans are After-Repair Value, Loan-to-Cost ratio, and Loan-to-Value ratio. If you haven't already, make sure to check out our article where we take a closer look at the significance of each of these terms.

 

 

ARV

 

ARV stands for After-Repair Value in the context of hard money lending. It is a crucial concept used by lenders to determine the loan amount for fix and flip projects. ARV represents the estimated value of a property after it has undergone the necessary repairs and renovations. When evaluating a loan application, hard money lenders assess the ARV to determine the potential profitability of the investment. By estimating the ARV, lenders can ascertain the maximum loan amount they are willing to provide to investors.

 

 

LTC

 

LTC, in the context of hard money lending, stands for Loan-to-Cost ratio. It is a significant metric used by lenders to determine the maximum loan amount they are willing to provide for a fix and flip project. LTC represents the percentage of the total project cost that the lender is willing to finance. The total project cost includes both the purchase price of the property and the anticipated renovation expenses.

 

For example, if a property is purchased for $100,000 and the renovation budget is $50,000, the total project cost would be $150,000. If the lender offers an LTC ratio of 80%, it means they are willing to finance 80% of the total project cost, which in this case would be $120,000. The remaining 20% is covered by the borrower as a down payment or from other funding sources. The LTC ratio serves as a risk management tool for lenders, ensuring that the loan amount does not exceed a certain percentage of the overall project cost, thereby mitigating potential losses in the event of unforeseen circumstances.

 

 

LTV

 

LTV, in the realm of hard money lending, stands for Loan-to-Value ratio. It is a critical factor used by lenders to assess the maximum loan amount they are willing to provide for a property. LTV represents the percentage of the property’s value that the lender is willing to finance through a loan. The value is typically determined based on the property’s current appraised value or its purchase price, whichever is lower.

 

For example, if a property is appraised at $200,000 and the lender offers an LTV ratio of 70%, it means they are willing to lend up to 70% of the property’s appraised value, which would be $140,000. The remaining 30% is covered by the borrower as a down payment or through other means. The LTV ratio acts as a safeguard for lenders. It is meant to reduce their risk in case of a borrower default or a decline in the property’s value. The LTV ratio is a key factor in determining the loan terms, interest rates, and overall feasibility of obtaining a hard money loan.