What if instead of being reimbursed by your private lender for your rehab, you received your rehab funds in advance?
We'll get back to this in a moment, but first let's take a look at the way most private lenders fund the rehab component of your fix & flip loan.
The traditional fix & flip loan consists of an initial component for the purchase of the property and a rehab component for the renovation of the property. While the initial purchase component is advanced at settlement for the investor to purchase the property, the rehab component is typically reimbursed based on the portion of the scope of work that has been completed.
It doesn't take a financial genius to understand that this is not an ideal cash flow situation, since the fix & flip investor needs to "float" the project to get to each draw reimbursement. Even the most experienced flippers and BRRR investors are forced to use credit cards and cash on hand to fund the rehab and then wait for reimbursement.
Unsurprisingly, we see the following negative consequences of traditional draw reimbursement:
As real estate investors go through waves of high credit utilization, their credit score suffers. This can cause issues when it comes time to refinance into a DSCR rental loan and the private lender limits the LTV due to credit score below 720 -- the magic number in real estate investing.
If your credit score is normally 740 but you just finished an intensive rehab that required using a high percentage of your credit card limit, you might find yourself in a situation where your credit score is now 670. In this scenario, at 740 FICO you'd qualify for 75% LTV on a cash out refi, but at 670 you might qualify for 65% LTV. That could easily be the difference between a perfect BRRR where you don't leave any cash in the deal, and instead leaving thousands of dollars in the deal or even worse: being forced to bring more cash to the refi closing table. In this scenario, your cash on cash return is significantly lower than it would otherwise be. Your cash that's stuck in the deal might have been your down payment for your next investment property.
This can lead to delays refinancing out of higher interest, short term interest only fix & flip loans, and can be especially stressful in a rising interest rate environment. If you take time to build back your credit to complete your refi, you might also miss out on your next deal.
Going one step further, low credit score can prevent you from qualifying for a DSCR rental loan, and when you otherwise would have rented and refinanced the property, you're now forced to flip it.
Long story short, the traditional draw process is a problem and OfferMarket Capital has the solution: Advanced Draws
Wouldn't it be better if you received a wire of funds for each stage of your rehab? Let's say you're ordering $20,000 of lumber and $12,000 of windows. What if we wired you $32,000 so you never have to carry a balance on your credit card?
With advanced draws, we will advance your rehab funds for each stage of your scope of work. We then inspect the work in order to advance funds for your next stage, and so on.
As long as you've completed 5 or more fix & flip or fix & rent rehabs, you are qualified for OfferMarket's Advanced Draws program. We think about this a credit score protection program, an excellent way to optimize your refi exit strategy and do more deals.
We'd love the opportunity to be your private lender.