Flipping houses in southern California is hot right now, especially in Los Angeles. Almost 25 percent of flipped houses occur in Los Angeles County. According to LendingHome, “ From 2014 to 2017, house flippers—who buy properties with the express purpose of fixing them up and re-selling them—sold 39,042 homes. The median sale price in those transactions was $140,000 higher than the last price paid, the ninth-highest total in all 58 California counties. That doesn’t take into account the amount flippers spend on repairs and renovation projects before selling properties though, so it’s likely that true profit is less than $140,000.”
The wide range in price makes the Los Angeles a prime choice for flippers. Investors can find homes ranging from $900,000 to $3,000,000. This disparity gives investors room to grow. And some LA neighborhoods are more popular than others.
San Diego is another Californian city that is popular for flipping houses. Other top counties for flipping houses include Fresno, Orange, San Bernardino, Alameda, Contra Costa and Sacramento. But, LA is still the capital flipping city of California. “The total number of homes purchased for a flip has been steadily increasing, and in 2017, over 45,000 homes in California were purchased for a flip. This represents an increase of about 60% over a 4 year span.”
The Basics of House Flipping
House flipping entails buying houses at a low price and selling it later at a profit. Most house flippers reap good gains. They buy, repair, sell and sometimes even rent out the home they bought. But, in order to make a profit in house flipping, it has to be done right. First of all, you must have enough capital for both the purchase and renovations. And if you don’t have enough money to do this on your own, there are plenty of California hard money lenders who will lend you the money. You also have to make sure you buy low and sell high. You can find cheaper houses from foreclosures, short sales and people who have to move right away due to the relocation of a job.
It’s also important to consider the location and market of the home you want to buy and flip. You want to buy in an area where there a good amount of homes that you can buy low and a good amount of buyers to whom you can sell high. The location should have a strong demand for newly-renovated properties, too.
The best type of home to buy and flip is one that needs just cosmetic repair. A fresh coat of paint, new carpet and yard work are all quick fixes. It’s wise to avoid homes that need a whole new roof or the duct work replaced. You’ll wind up with less sweat equity in the end with those types of repairs.
The turnaround time to fix and flip a real estate property will affect how much profit you can make. If you’ve got capital tied up in one property, you may not have enough for other investments. Most flippers plan to buy a fixer upper and put it on the market for sale in 90 days and not less. That’s because Freddie Mac and Fannie Mae will not give mortgages for properties that the seller has owned for under 90 days.
It’s a wise move to work a realtor if you’re considering flipping houses. A realtor will know all about rehab candidates in the area and can even help market the home once it’s ready for sale. A realtor can also advise on what repairs will yield you the most payback.
Hard Money Lenders in California
Hard money loans are also known as rehab loans. These types of loans are ideal for flippers who want to buy, renovate and flip a property within a year. They are also perfect for funding the cost of renovations. Hard money loans have lower qualifications for approval and are more focused on the potential value of the home instead of about the borrower’s background.
Rehab loans from California hard money lenders are good for experienced flippers with two past rehab projects, first time flippers who will be working with licensed contractors and flippers who will be competing with all-cash buyers.
Hard money lenders in California typically require these minimum requirements:
- Experience- at least two rehab projects
- Debt-Income Ratio- 35 percent to 45 percent
- Credit- a credit score of at least 620
While hard money loans have higher interest rates than traditional loans, the upside is that they have shorter terms and the money can be used to pay for renovations and repairs. Lender fees are taken out of the loan, and closing cost fees are also taken out of the loan. Rehab loans and terms are:
- One to three years
- Have interest rates ranging from 7.5 percent to 12 percent
- Have closing costs ranging from 2 percent to 5 percent
- Entail lender fees from 1.5 percent to 5 percent
Property Types for Hard Money Lenders in California
“A borrower can get a hard money loan on almost any type of property – including single-family residential, multi-family residential, commercial, land, and industrial. Some hard money lenders in California may specialize in one specific property type, such as residential and not be able to do land loans, simply because they have no experience in this area. Most hard money lenders in California have a specific niche of loan they are most comfortable with. Ask them upfront which type of loans they are willing and able to do.
Many hard money lenders will not lend on owner-occupied residential properties due to the extra rules and regulations but there are those who are willing to wade through the paperwork with the borrower. All hard money lenders will do loans in 1stposition, while fewer will do 2nd position due to the increased risk for the lender.”
Finding California Hard Money Lenders
Finding good California hard money lenders can be a challenging and time-consuming process. You can use a directory service to find one. You may also want to consider local real estate investment groups, realtors and local title companies. Using a hard money lender is a good resource when you’re looking for a hard money loan in California. But, you want to make sure that you find a good one. It’s important to note that hard money lenders differ from one another. Variables include minimum and maximum loan size, type of real estate, level of service, loan-to-value guidelines and geographical region. Here are some tips for finding good California hard money lenders.
- Seek a firm that specializes in lending hard money. The compliance requirements for rehab loans are complex, and you’ll need the expertise of a specialist. A specialist will know how to structure the rehab loan for the best outcome for everyone.
- Go with a firm that has a high degree of transparency. You should access to all of the loan information, from origination to closing. Ensure the firm you choose adheres to all of the loan program guidelines.
- Make sure the firm is licensed. A good hard money lender will be licensed by the State Department of Real Estate. In addition, ensure that the lender has a real estate broker license, and check to see if there have been any complaints. The rehab money lender you choose should have a good reputation in the industry.
- Search locally for a hard money lender. Most hard money lenders will want to do an inspection of the property that you want to purchase before they secure a loan with you. Plus, local lenders are more flexible than nationwide lenders.
- Determine your rehab money needs. You can find hard money lenders who specialize in commercial properties, foreclosures and investor financing. And before you present a property to a hard money lender, make sure you know the purchase price of the property, the address of the property, renovation budget, renovation costs and closing date.
- Understand loan-to-value ratio. This is significant. Unlike traditional lenders, hard money lenders use the value of the property for collateral. Their focus is on asset value and the loan-to-value ratio. And, they usually take a more conservative approach to their valuation methods. Most hard money lender will not lend more than 70 percent of a property’s value.
There are some good reasons to use hard money lenders in California instead of a traditional mortgage with a bank. First of all, it’s convenient. Applying for a traditional mortgage takes time, and it can take months to close on it. During that wait period, an investor can lose out on a good deal. With hard money lenders in California, you can get funding in just weeks. If you’re funding a big project, that’s a good thing. Plus, hard money lenders in California offer flexible terms. There’s more room for negotiation than with a bank. You may be able to structure a repayment schedule that’s better for you or get the origination fee the loan eliminated. While hard money lenders in California use the property itself as collateral, there may be some leeway. You may be able to secure the rehab loan with personal assets like a residential property or a retirement account.
How Much Do Flippers in California Make?
According to the real estate experts, “California ranked as the 11th highest flipper state with 6.2 percent of all homes were flipped, said Daren Blomquist, Attom’s senior vice president. The second sale of the same property within a 12-month period defines a flip. Fresno led California for the highest number of 2017 flips at 9.6 percent. In Southern California, the Riverside-San Bernardino metro area ranked sixth with a per property gross flip profit of 36 percent. That translates to an average of $79,300. Nice!The Los Angeles and Orange County market turned a 2017 gross profit of 32 percent, averaging a doubly-nice gross profit of $135,000. Cha-ching!”
As you can see, there’s money to be made in renovating and flipping properties. Just be careful if you’re a newbie to this industry. You really do need to do your own due diligence. Take time to learn your market and then find a good California hard money lender.