How To Flip Houses With Bad Credit

House flipping, the art of purchasing properties, renovating them, and selling them for profit, has gained tremendous popularity as a lucrative avenue for real estate investors. However, individuals with bad credit often face significant challenges in securing financing for their ventures. This guide aims to address this hurdle by exploring the role of hard money lenders in real estate investing and providing strategies to successfully flip houses. 

At LJC FInancial, we empower borrowers by focusing solely on the value of their collateral, ensuring that credit history plays no role in determining the loan amount they qualify for.

What Does “Bad Credit” Mean?

How trustworthy you are as a borrower is significantly influenced by your credit history. You are more likely to meet new financial responsibilities on time if you have previously met your financial obligations promptly. Showing a track record of on-time payments gives potential creditors hope. Making late or missed payments on earlier loans might result in bad credit, which lowers your credit score overall.

“A bad credit history” is a broad phrase that has multiple meanings. Many conventional lenders won’t provide loans to real estate speculators with credit scores below 660, 680, or even 700. Practically speaking, people who don’t meet the minimum credit score requirements are considered to have “bad” credit histories.

Understanding Hard Money Loans

Hard money loans are a specialized form of financing that play a crucial role in real estate investing. These loans are typically short-term and asset-based, meaning they are secured by the value of the property itself rather than relying heavily on the borrower’s creditworthiness. Unlike traditional loans, hard money lenders focus primarily on the collateral value of the property when assessing the loan application. There are three key differences between a hard money loan and a traditional loan.

Shorter Loan Terms

Hard money loans frequently offer shorter loan periods than conventional lending choices as well. Hard money loan terms typically range from a few months to a few years, although standard mortgages may last for several decades. This more condensed time frame aligns with the essence of real estate investing, where the goal is to remodel and profitably sell the home quickly.

Quick, Flexible & More Accessible

It’s important to understand that hard money loans in real estate investing have a specific function. They provide borrowers with flexibility, quickness, and accessibility who might struggle to qualify for conventional finance because of credit issues or particular property types. Investors can use this financing option efficiently to support their real estate projects and capitalize on profitable chances by understanding the terms and characteristics of hard money loans.

Finding & Evaluating Potential Properties

Before looking into securing a hard money loan, you should have a piece of property in mind that you would like to flip. There are a few considerations to make when searching for a house to flip as an investment: identifying distressed properties in your desired area, conducting comprehensive market research, evaluating profit margins, and assessing repair costs. All of this information helps investors make an informed decision when selecting the right property to flip. 

Identifying Distressed Properties: Distressed properties are properties that are in poor condition, facing foreclosure, or are in a state of disrepair. Networking with real estate agents specializing in foreclosures, attending local auctions, exploring online listings, and driving through neighborhoods to spot neglected properties are all effective ways of finding distressed properties.

Conducting Market Research: Analyze local market trends, examine comparable property sales, and evaluate the demand for renovated homes in the desired area. 

Evaluating Potential Profit Margins: Assessing potential profit margin is an important step in evaluating homes to flip. You can determine the potential profit value by estimating the ARV (after repair value) and subtracting the purchase price, estimated repair costs, closing costs, and financing expenses.

Assessing Property Condition & Repair Costs: Hiring a qualified home inspector to conduct a detailed inspection of the property’s structural elements, electrical systems, plumbing, and overall cosmetic condition can provide valuable insights into the property’s repair requirements and associated costs.

Building a Strong Proposal for Hard Money Lenders

Make a persuasive proposal using all of the market research and analysis you have done on the potential property once you have located a property you are interested in flipping. When creating a proposal for a hard money loan, there are a few important considerations to bear in mind. Your proposal will effectively explain your investment strategy, the potential of the property, your exit strategy, and your team’s qualifications to hard money lenders if you cover these issues briefly.

Make a Business Plan: 

  • Outline your plans and objectives
  • Describe the demand for renovated residences in the market today
  • Indicate your financial requirements and the intended use of the hard money loan

Describe Your Properties in Detail:

  • List the property’s problems and current state
  • Describe market trends and comparative market statistics
  • Include distinctive highlights, features, or value-add opportunities
  • Explain your renovation plan and its impact on property value

Present a Solid Exit Strategy:

  • Provide an estimated timeline for renovations and property sale
  • Discuss pricing strategy and market alignment
  • Address potential risks and mitigation plans

Highlight Team Skills & Expertise:

  • Showcase team members’ relevant experience and successful past projects
  • Highlight professional qualifications and licenses

Finding the Right Direct Hard Money Lender

Not all hard money lenders are the same. Some hard money lenders act as a broker while others like LJC Financial are considered direct hard money lenders. Direct hard money lenders can give you a “go/no go” decision quicker than a broker or advise you on what it will take to get your project funded. Here are a few things to look for when selecting a hard money lender to work with on your next house flip. 

Experience and Expertise: Look for hard money lenders who have experience in real estate investing and lending, house flipping loans, and real estate investment projects. It is an added benefit to having a lender who has in-depth knowledge of the local market. 

Loan Terms and Interest Rates: Review and compare the interest rates, loan-to-value ratio, points, fees, and repayment terms of the loans offered by different hard money lenders. Choose a lender whose loan terms meet your unique financial situation and specific project needs.

Flexibility and Speed: How flexible can the lender be? Are they able to tailor their terms to your project requirements? Turnaround time is vital to sticking with a house flip timeline. 

Transparency and Communication: Select a lender who is transparent about their processes, terms, and fees. Clear communication is critical throughout the whole process from approval application. A good hard money lender will be responsive and readily available to address any of your questions or concerns. 

Reputation and Reviews: Research the lender’s reviews and industry reputation. What do their prior client’s testimonials say about their own experience? Are there any testimonials that speak directly to an experience with a house-flipping loan?

Choose a hard money lender who not only gives the required funding but also understands your project aims, provides acceptable conditions, and aids your property-flipping endeavor with knowledge and direction. With the right hard moneylender, your house flip will be a successful financial opportunity. 

Take the next step in your new financial endeavor, contact LJC Financial to learn more about what a hard money loan can do for you. We specialize in single-family, multi-family 1-4, and residential rent-to-own projects, however, we can fund a wide range of commercial real estate investment opportunities. Whether it’s your first deal or your 50th, we provide personalized guidance and direction regarding a variety of financing options and work hard to build long-lasting relationships by earning your trust.