The question is: How much should you be willing to pay for the privilege of using other people’s money to cash in on a larger volume of these opportunities while they last?
The current pool of distressed REOs being marketed to the public may not appear that large, but there is a whole new wave of non-performing loan notes coming down the pipe, ripe for flipping either as paper or brick-and-mortar properties.
Transactional lenders, commercial mortgage companies, and private money lenders are all eager to cash in on this, too, and need to put capital to work.
These lenders are hungrier and more open to loaning their cash than they have been for years, with some almost begging investors to use their cash (for the right price of course).
So what type of rates should investors expect to pay, what’s reasonable, and when are they just being robbed blind?
What It Costs to Flip Non-Performing Notes
Lots of short term money is available to those flipping or looking to lock down deals while marketing them to raise other capital and better terms on long financing. But rates can vary from below market to the high double-digits.
If you are new to this type of borrowing, it is easier to streamline your search by recognizing the different types of lenders in the marketplace. There are private individuals simply looking for more security, diversity, and better returns than they are currently seeing on retirements funds, which can offer short-term working capital at very attractive rates and with a lot of flexibility.
Then there’s the usual mix of hard-money lenders, who normally charge two to six points, plus eight to 14% interest. Also, don’t forget the opportunistic loan sharks asking for 20% interest and more points. If it’s within the boundaries of the law it is really up to those with the cash to set rates they feel offset the risk, and up to the borrowing investor to determine whether it is worth it.
However, when shopping for cash for flipping non-performing notes and distressed REO investors would be wiser to shop for the terms and loan features that are most important to them personally and that fit their investment strategy. For example: are extensions available if delays occur and are there any deferred payment options?
While some of these interest rates and borrowing costs can appear high, those that already have a defined exit strategy and get out before they ink the deal really may not feel much difference in costs at all. And they can easily control and flip many times the real estate and paper they have in the past by using this leverage.