Alt-Lending Fix & Flip Program: Tips To Get Your Deal Approved
| August 29, 2023 |
Alt-Lending Fix & Flip Program: Tips To Get Your Deal Approved
Neighbourhood’s Fix & Flip program allows real estate investors access to competitive pricing and low-hassle underwriting, facilitating these often time and cost-sensitive transactions.
Purchasing discounted properties in below-optimal conditions and unlocking their value through cosmetic renovations is a popular investment strategy for hands-on real estate investors.
Neighbourhood’s Fix & Flip program allows these investors access to competitive pricing and low-hassle underwriting, facilitating these often time and cost-sensitive transactions.
Below you will find a few tips and decision-making criteria that will help you advise your clients on how to increase their chances of landing a Neighbourhood loan.
At Neighbourhood, we pride ourselves on having a straightforward and common sense underwriting approach that is both a quick, as well as a low-cost option for borrowers needing an alternative solution to bank or monoline lender financing.
We often lend to real estate investors looking at purchasing a property, doing cosmetic renovations such as updating bathroom tiling, re-carpeting living areas, and adding a new coat of paint, and then selling the property for a profit in a 1-4 month time frame.
That being said, we are not full renovation specialists. If you are looking for a lender that is comfortable with full renovations including structural changes to the property, or lending based on purchase plus improvements, feel free to get in touch with us. We'll be more than happy to provide you with tailored recommendations.
Here are our main decision-making criteria at Neighbourhood:
Marketable Unimproved Collateral
Without the renovations, is the property still marketable to the broader public?
If renovation work is either halted partway or not started and the property falls into foreclosure, it would not be favourable for a lender like us to take over the renovation process, or to have to market the property to a limited pool of other investors interested in fix and flips, who are also looking to buy at a discount.
Factors like location, the relationship between land value and building value, and purchase price, are all taken into consideration at this stage.
Work To Be Done
What work will be done?
As we only allow cosmetic renovations, we want to ensure that the work to be done will not put the property in an unmarketable state or significantly affect the value of the property for the worse while the work is being done.
Will the property be unoccupied, and what is the timeline for completion?
This presents a risk both to the borrower (no income during this time), and to us as a lender (is the work being supervised frequently to evaluate quality of work?).
We would also like to know the timeline for renovation work - a few weeks is reasonable, but months worth of work would likely indicate that the renovations are more than cosmetic, and potentially affect the exit strategy if there are delays.
What is the budget?
We need to ensure that the borrowers have sufficient funds to complete the renovation work. A budget that is unreasonably high would also raise questions on whether the work is truly cosmetic or if some structural work might be planned, but not disclosed.
Additionally, a high budget might also indicate that luxury renovations are taking place, which in some cases might have diminishing returns, putting the borrowers in a tight situation if the market does not value those elements as much as they cost.
Borrower’s Credit History
This one is not specific to our Fix & Flip program, but we always want to know if this is a reliable borrower and someone who prioritizes paying their debts, especially their mortgages, on time.
Now that you know a few of the factors that some lenders like Neighbourhood consider when evaluating Fix & Flip files, here is a summary of the specific pros and constraints of our own program:
The pros:
We have terms that are open after 3 months with no lender fee, as well as fully open terms that are payable at any time, with only a 1% lender fee. We also offer interest-only loans with no additional premium.
This lowers borrowing costs and helps with cash flow.
We don’t have a limit on the number of properties a borrower can own.
As long as the borrower can reasonably service the loan, we can consider the deal.
We lend to HoldCos with no premium but require personal guarantees.
We don’t charge premiums for rental properties.
Renewals are a flat $295 and borrowers get placed in the best available rate at the time of renewal.
This provides peace of mind in case the exit strategy doesn't pan out exactly as planned.
We allow 2nd mortgages and alternative sources of downpayment up to 85% LTV.
This includes HELOCs or other private loans, for example, from family members.
We do not require income/tax documents or financial statements.
This expedites the underwriting process so we can issue commitments within 24 hours.
The constraints:
We only allow cosmetic renovations (non-structural) that don’t put the property in an unmarketable state.
The property should be marketable “as is” and not rely almost completely on land value.
We prefer if the property is not unoccupied for a prolonged period, or at all.
We only lend on “as is” value, not "as complete" or "purchase plus improvements".
Our current max LTV is 65%-70%.
Our minimum property value is $200k and the minimum loan amount is $100k.
Of course, there are many other factors that might differ from what is outlined above, but this overview comes from the most common requests we get from our broker partners.
If you have a Fix & Flip file on your desk, please contact us via the button below to discuss your deal and get an idea of whether we are the right lender for your client.
Author Profile
Diego Landa is a Business Development Manager at Neighbourhood Holdings. He has 7 years of experience executing for and leading business development teams in the software and finance industries and has a passion for helping motivated professionals thrive. He is also an avid mountain biker, cook, and traveller.