A fix and flip loan is built for a very specific job: buy a property that is not ready for the market, finance the work to improve it, and hold it just long enough to sell or refinance. Because the loan is secured by real estate and the timeline is short, lenders focus on the property, the plan and your ability to execute it. This guide explains how the loans work, what they cost, and what to prepare. Bethany Sanchez (NMLS #2425491) at Sunset Home Lending helps investors in Scottsdale, Arizona evaluate these loans alongside longer-term options such as DSCR financing.
Educational information only. These are business-purpose loans for investment properties. They are not for personal, family or household use, and approval is never guaranteed. Terms vary by lender, property and borrower.
How fix and flip loans work
Most fix and flip loans have two parts:
- Acquisition funds to help you purchase the property at closing, often a percentage of the purchase price.
- Rehab funds held in reserve by the lender and released in draws as the renovation progresses, often covering a large portion or all of the approved renovation budget.
You make payments, usually interest-only, on the amount that has been disbursed. At the end of the term the loan matures, and you pay it off from the sale of the property or a refinance. Terms generally run from several months to a couple of years, with extension options offered by some lenders.
The numbers lenders look at
Three measurements drive almost every fix and flip decision:
- LTC (loan-to-cost): the loan amount as a percentage of the total project cost, meaning purchase price plus renovation budget.
- LTV on purchase: the loan against the purchase price.
- ARV loan limit: the total loan, including rehab funds, as a percentage of the after-repair value.
Lenders typically use the lowest of these limits, which is why a great purchase price on a small renovation can still require meaningful cash from you. Programs differ, and leverage can vary based on experience, credit and the type of project.
A quick screening example
Many investors use the 70 percent rule as a first check before they dig into the details. Here is an illustration with made-up numbers:
| Item | Amount |
|---|---|
| Estimated after-repair value (ARV) | $350,000 |
| Multiply by 70% | $245,000 |
| Estimated repair costs | $50,000 |
| Maximum purchase price under the rule | $195,000 |
The rule leaves room for financing costs, holding costs, selling costs and profit. It is only a screen. Your real numbers need to include loan points and fees, interest, property taxes, insurance, utilities, permits, real estate commissions, closing costs and a contingency for surprises.
What lenders typically want to see
- A clear purchase contract and property details.
- A detailed scope of work and budget. Vague budgets lead to cost overruns and delays.
- Comparable sales supporting the ARV.
- Your experience and team. A track record helps, and so does an experienced contractor.
- Credit and liquidity. Lenders want evidence you can handle the cash needs and absorb setbacks.
- A believable exit strategy. Plan A is usually a sale. Plan B may be a refinance into a rental loan.
- Insurance. Vacant or under-renovation properties often need special coverage.
Costs to expect
Short-term loans cost more than long-term mortgages because lenders take more risk and the loans are more labor intensive. Common cost categories include:
- Interest. Often charged on funds actually disbursed, and often interest-only.
- Origination points. A percentage of the loan amount charged at closing.
- Closing costs. Title, escrow, recording and legal fees.
- Appraisal and property inspection fees.
- Draw or inspection fees each time you request rehab funds.
- Extension fees if you need more time.
- Holding costs. Property taxes, insurance, utilities and maintenance while you own the property.
- Selling costs. Commissions, transfer taxes and closing fees when the property is sold.
Because the rates, points and fees differ widely between lenders, we do not publish them. Ask for a written term sheet and compare the total cost of the project, not just the interest rate.
The draw process
Understanding draws can save you headaches:
- Close on the loan. Acquisition funds go to the seller and the rehab funds are held in reserve.
- Begin the work. Start according to your budget and schedule.
- Request a draw. After completing a phase, such as demolition or rough plumbing, you submit photos, invoices or an inspection request.
- Verification. The lender or a third-party inspector confirms the progress.
- Release of funds. The lender releases the draw, often to you or directly to the contractor.
- Repeat until completion.
Because draws take time, many investors keep working capital available to pay contractors while they wait for reimbursement.
Exit strategies
- Sell the property. The proceeds repay the loan, and you keep the remaining profit.
- Refinance and hold. After renovation, you may refinance into a long-term loan such as a DSCR loan or conventional investor loan and keep the property as a rental. This is the heart of the BRRRR strategy.
- Sell with seller financing or another structure. This depends on the loan documents and on legal advice.
The best exit plans have a backup. If the market softens, the sale price falls short or the appraisal comes in low, you should still have a path to repay the loan.
Bridge loans for investors
A bridge loan is a short-term loan that covers the gap between acquiring a property and securing the final financing. An investor might use one to close quickly on a property before a refinance is ready, to hold a property while it is stabilized and leased, or to buy a new property before selling another. Bridge loans are normally underwritten on the property, the borrower’s plan and the exit strategy, and they usually carry higher costs than long-term loans.
A note for homeowners: a loan to buy a new home before you sell your current home is a consumer transaction, and different rules and protections apply. If that is your situation, contact us so we can explain your options.
Risks and how to manage them
- Renovation overruns. Build in a contingency of at least 10 to 20 percent and get multiple bids.
- Schedule delays. Permits, inspections and material lead times often take longer than expected. Longer schedules increase interest and holding costs.
- Market changes. If prices drop or demand slows, the property may sell for less than your ARV.
- Appraisal gaps. The finished property might not appraise at your projected value.
- Contractor risk. Verify licenses and insurance, avoid paying too much upfront and keep written contracts.
- Personal guarantee. Many loans require one, which can put your other assets at risk.
How to prepare your deal package
Lenders respond best to organized borrowers. Before you apply, assemble:
- Purchase contract and property photos
- Scope of work with line-item costs, and your contractor’s information
- ARV analysis with comparable sales
- Your entity documents and ID
- Proof of funds for the down payment, closing costs and reserves
- A schedule of real estate owned and a summary of your experience
- Your exit strategy and a backup plan
Talk through your deal
Every project is different, and the right financing depends on your numbers and your timeline. Contact Bethany Sanchez or call (760) 713-3814 to talk through your deal. You can also explore our full investor loans overview or learn how to turn a finished project into a long-term rental with a DSCR loan.
Frequently asked questions
What is a fix and flip loan?
A fix and flip loan is a short-term, business-purpose loan used to buy a property that needs work, pay for the renovation and hold it until you sell or refinance. The lender usually funds the purchase at closing and releases renovation money in stages called draws as work is completed.
How long are fix and flip loan terms?
Terms typically run from about six months to a couple of years, often with interest-only payments and a balloon payoff at the end. Some programs offer extension options for a fee. Choose a term that leaves cushion for delays, permits and the time it takes to sell.
What is ARV and why do lenders care?
ARV, or after-repair value, is the estimated market value of the property once the renovation is finished. Lenders use it to limit how much they will lend relative to the finished value, because that is the amount they expect to be repaid from after a sale or refinance.
Do I need experience to get a fix and flip loan?
Experience helps, and some programs require it, but first-time flippers can qualify with the right plan. Lenders may ask for more cash from you, a detailed scope of work, an experienced contractor, or lower leverage when you have no track record.
How do renovation draws work?
After closing, the lender holds the renovation funds in reserve. When you complete a portion of the work, you request a draw, an inspector or the lender verifies progress, and the funds are released. Draws may carry inspection or administration fees, and delays can slow the project, so plan your cash flow.
What is the 70 percent rule in house flipping?
The 70 percent rule is a rule of thumb that says an investor should pay no more than 70% of the after-repair value minus the cost of repairs. It is a quick screen, not a lending rule, and costs such as financing, holding and selling can push a deal outside the rule.
What is a bridge loan?
For investors, a bridge loan is a short-term loan that covers the time between acquiring a property and securing long-term financing or selling it. It is secured by real estate and underwritten mostly on the property and your exit plan. If you are a homeowner who needs temporary financing to buy before selling your current home, contact us because consumer bridge loans follow different rules.
What happens if my project runs past the loan term?
You may be able to request an extension, usually for a fee, or refinance into longer-term financing such as a DSCR loan if the property qualifies. If you cannot sell, refinance or extend, the loan can go into default, and the lender may pursue the collateral and any personal guarantee. That is why a realistic schedule and a backup exit matter.