Commercial Loans and Fun Blog

Fix and Flip Loans and the Minimum Skin in the Game

Posted by George Blackburne on Tue, Nov 21, 2017

Interior renovation-1.jpgOne of the most important questions asked by fix and flip borrowers is, "How much cash do I have to bring to the closing table?"  The good news is that fix and flip loan borrowers ("renovators") need far less cash than home builders or commercial real estate developers.  In fact, I promise you that you will be thrilled and pleased with how little cash a renovator has to bring to the table. Hooray!  Just be patient.

Before we get into exactly how much cash a renovator needs to qualify for a fix and flip loan, let's use this opportunity to review commercial construction loans and the Loan-to-Cost Ratio.


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The Total Cost of a commercial construction project is calculated as follows:

Land Cost plus
Hard Costs (brick and mortar) plus
Soft Costs (governmental fees, interest reserve, etc.) plus
Contingency Reserve (5% of hard and soft costs) equals

Total Cost

When underwriting commercial construction loans, banks usually require that the Loan-to-Cost Ratio not exceed 75%.  In other words, if the total cost of the project is $1 million, the developer must contribute at least $250,000 in cash to the project.  Ouch.


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Prior to the Great Recesssion, when banks got killed on their commercial construction loan portfolios, most banks would happily lend up to 80% loan-to-cost.  In other words, the developer only had to come up with 20% of the Total Cost of the project.  Some banks were even going 90% loan-to-cost.  After commercial real estate collapsed by 45%, Dr. Phil might have asked the banks, "How did that work out for you?"  Ha-ha!  

Having learned their lesson painfully, banks now require that commercial real estate developers contribute at least 25% to 35% of the Total Cost of the project.  But you and I don't care!  Our fix and flip loans are residential loans, not commercial loans, and the secondary market is absolutely ravenous for fix and flip loans.  You or your renovator will NOT need to contribute 25% to 35% of the Total Cost of the project.  No-no-no.


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So how much cash will a renovator need to contribute to qualify for a fix and flip loan?  Well, the first wonderful thing to appreciate is that fix and flip lenders do not even use the Loan-To-Cost Ratio.

To qualify for a fix and flip loan, the renovator only has to come up with
20% of the price of the dilapidated house being purchased!

Please note that we are NOT talking about 20% of the Total Cost of the project.  We are only talking about 20% of the property purchase price.


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John Renny is buying a rundown house in a nice area for $100,000.  He will need another $60,000 to renovate the property.  John only has to come to the closing with $20,000 - 20% of the purchase price of the rundown house!  His fix and flip lender will loan him 100% of the dough to effect the repairs and upgrades.  Wow.  Is this a great country or what?


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Just for fun, let's compute the Loan-to-Cost Ratio of John Renny deal above - a fairly typical residential fix and flip deal.

House Purchase Price (in a dilapidated condition) plus
Hard Costs (of renovation) plus
Soft Costs (closing costs, report fees, 4 mo's interest reserve) plus
Contingency Reserve (5% of hard and soft costs) equals

Total Cost

Now let's plug in the numbers.  C'mon, guys, don't zone out on me here.  This is fourth grade math.  Maybe third grade math.


House Purchase Price = $100,000
Hard Costs = $60,000
Soft Costs = $16,000
Contingency Reserve = $3,800

Total Cost = $179,800

In our example, John Renny is bringing only $20,000 in cash to the closing table, which is the magical 20% of the cost of the dilapidated house.  Therefore his fix and flip lender will make him a loan for the difference - $179,800 minus the $20,000 downpayment equals $159,800.

Okay, so what is the Loan-to-Cost Ratio of John Renny's imaginary fix and flip loan?

$159,800 / $179,800 x 100% = 88.9% Loan-to-Cost!!!


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Wow.  Nowhere else in the civilized world can a real estate developer get this kind of leverage.  This is why successful fix and flippers are making incredible retuns on their money.


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I met a nice lady from Alaska a few years ago who lives in Anchorage.  Every year several people in Alaska are stomped to death by a moose, so finding one in your swimming pool is not really a laughing matter.  A college classmate (interestingly she is white) of my daughter is from Swaziland, and she is crashing with us over the Thanksgiving holiday because its too far to travel back to Africa.  When I asked her about wild lions and tigers and bears, she said that the hippo's are the big killers in Africa.  Huh.  Who would have thunk it.  Such friendly looking animals.  And don't even get me started on the dangers of Porky Pig...  :-)


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Topics: fix and flip downpayment