One of the most exciting developments for me as a private money mortgage broker has been meeting investors who are willing to help out well-qualified rehabbers and contractors with gap funding. Gap funding is that percentage of project cost, whether it is down payment or some portion of the rehab costs, or both, that a first mortgage holder is not willing to carry. Typically, this gap is 20-35% of the purchase price plus 20% or more of the rehab funds, and also some closing costs associated with the loan origination and title work.
Normally, lenders want an investor to have “skin in the game” when doing a fix-and-flip project. These are higher risk projects and it only makes good business sense that a money lender will want both higher interest for these projects and some indication that the rehabber has cash to complete the job. Nothing is worse than seeing a house that has been left vacant for a number of years because of a half-done, amateurish attempt at a rehab project. They create eyesores, dangerous properties where criminal activity tends to happen, and they lower property values for everyone in the neighborhood.
I work with a number of highly successful and experienced rehabbers and contractors, however, who have track records to show that they can complete projects on time, on budget, and sell for what they expect or better. For these highly qualified and experienced investors, when they need gap funding, I now have some private investor resources that can help, as long as the first mortgage-holder will agree to allow a second mortgage to cover the gap. Experienced investors have a way of attracting more business at times than they have resources to cover financially and yet their experience and their ability to pick good projects can make covering their fix and flip needs 100% with outside funds a relative “no brainer.”
I am developing a group of private lender contacts within Iowa at this point, who will consider supporting rehabbers with their gap funding needs on a case-by-case basis. I would like to develop relationships with private lenders in other states as well who will also cover gap funding needs for well- qualified rehabbers and contractors locally or within a larger area so that when rehabbers call me for help in funding a loan I can find a way to close the funding gap for them either through a second mortgage debt instrument, or through some equity participation. I work primarily on private funding needs in Iowa, Wisconsin, Illinois and Missouri, but I do get calls from investors throughout the country, and gap funding is one of the top issues I face in being able to close loans for investors.
Rehabbers, please understand that many of the private lenders who are willing to take a risk on a second mortgage position have been in your shoes and know what is involved in the fix-and-flip process. They are probably going to need a higher return on investment to take the risk on gap funding than they might receive funding the majority of the loan with a first mortgage. They will also need to earn more funding a gap loan than they would make on their own typical fix-and-flip project. The more you can sweeten the pot for these private money heroes who make your project possible, the more likely you will get the deal funded. Please also be aware that unless you have a no-brainer, can’t miss project, you will need to have previous experience to convince a fix and flip funder (or me as a mortgage broker) to cover the loan 100%. If you are using a bank or hedge fund for your first mortgage position, then it may also be difficult to get a second mortgage approved to cover 100% of the deal. On the other hand, most lenders will allow you to take on an equity partner to close the gap, and some of the gap funders I am identifying will be willing to fund based on an equity position as long as the deal is solid.
If you are a private lender, consider gap funding. While risks are greater, especially on fix-and-flip deals, the returns can be greater and the velocity of return can also be higher. If you are a rehabber or contractor with a no-brainer deal and some experience behind you, and you just need to close a gap in your funding to begin a great rehab project, let’s see if we can find some gap funding for you so you can get the deal done!