It’s a common fear among many beginners and it’s justifiable. Thankfully it is a situation you can avoid altogether if you take the necessary steps with your lenders way ahead of time. This will depend on the type of loan you have on the house, however.
Here are two situations that you may face and how to deal with them effectively.
The Private Lender
When working with a private lender, you are the one in charge of setting the terms. You can choose to guarantee the loan or set up an equity deal. What’s important is to ensure that your lenders money is secure.
To avoid getting yourself in a position where you can’t pay off the loan as agreed within the given time frame, you can add a stipulation in your agreement that includes a “when the property sells” clause.
The idea is to protect yourself just in case your house flips don’t sell. While it is not advised that you keep property longer than six months, this clause exists to give you protection just in case your lender wants to foreclose on you.
The Hard Lender
Hard money lenders are a little like banks and they create the rules. Some house flippers are enthusiastic to score their first deal with a hard money lender and as a result they agree to a six month term.
This is a huge mistake especially if you are new in the business. A lot of things could go wrong and you might be unable to sell the property within six months. So what happens next?
If you plan to get funding from a hard money lender, always try to get at least a one year term. It’s important to ask your hard money lender what will happen if you are unable to close the deal within twelve months. If they say that they will foreclose, then you have to be very careful with this lender.
If they promise to give you an extension, make sure you get it in writing. It’s better to be proactive than reactive.
It’s important to under-promise and over-deliver than do the exact opposite. Talk to your lenders and find out what could happen if your house flips don’t sell on time. Be honest at all times not only with your lenders but with your customers.
Beware of hard money lenders who might try to take advantage of you. Most of them know what happens when house flipping goes wrong and will not hesitate to take advantage of the situation.
Do you think I left out anything? Share your opinion by leaving a comment below.