What Every Investor Should Know Before Financing a Fix and Flip

How Fix and Flip Loans Are Structured

Fix-and-flip financing is almost always some form of short-term bridge or hard money lending. The lender advances a percentage of the purchase price and, in many cases, a portion of the estimated rehab budget. The total loan is evaluated against the after-repair value (ARV), which is the estimated value of the property after all planned improvements are complete.

A typical structure might advance 75% to 80% of the purchase price plus 80% to 100% of the rehab budget, so long as the total loan doesn't exceed 65% to 70% of ARV. The borrower funds the difference from their own capital. This structure protects the lender while giving the borrower access to leverage to scale the project.

ARV-Based Lending: Why the Appraisal Matters

The ARV appraisal determines the maximum loan amount and the feasibility of the project. If the appraiser comes in below the investor's projected ARV, the available loan amount shrinks and the investor may need to inject more capital or restructure the deal. ARV appraisals are based on comparable sales of similar renovated properties in the same market. In neighborhoods with limited renovation comp sales, ARV can be harder to support.

Investors sometimes use optimistic ARV assumptions to justify deals that don't work at conservative estimates. Coventry Enterprises LLC uses conservative ARV in all deal analysis, testing whether the projected return still makes sense if the actual sale price comes in 5% to 10% below the appraised ARV.

Draw Schedules for Rehab Projects

When rehab costs are included in the loan, they're typically released through a draw schedule similar to construction loans. Draws require inspection and documentation. The gap between completing work and receiving reimbursement means contractors and material suppliers often need to be paid before the draw arrives. Investors need working capital beyond what the loan advances to keep projects moving without stoppages.

Jack Bodenstein and Coventry Enterprises LLC review draw schedules for rehab projects to verify the number of draws is adequate for the scope of work, the documentation requirements are manageable, and the inspection timeline won't create delays that push the project past the loan term.

Cost Overrun Risk

Renovation budgets are estimates. Actual costs rarely come in under estimate and frequently come in over. Deferred maintenance discovered during demolition, structural issues hidden behind finished walls, and material cost fluctuations all push budgets higher. An investor with no contingency reserve and a loan sized to the original budget can run out of money mid-project.

The standard advice is to budget a 10% to 15% contingency on top of the itemized rehab estimate. In older properties or in markets with high labor costs, that number should be higher. Projects that fail financially almost always fail on the cost side, not the revenue side.

Exit Strategy

Fix-and-flip financing is predicated on a sale. If the property doesn't sell at or near the expected price within the loan term, the investor faces extension fees, additional carry costs, and potentially a forced sale at a discount. Testing the exit means reviewing recent comparable sales carefully, understanding the current time-on-market in the neighborhood, and pricing conservatively enough that the deal works even with a lower sale price.

Some investors use a refinance-to-rent exit when the sale market softens. That requires the property to qualify for a DSCR or conventional investment loan at completion, which adds another underwriting hurdle. Coventry Enterprises LLC models both the sale exit and the refinance-to-rent exit for every fix-and-flip review to understand what happens if the primary exit doesn't work.

For more on investment property financing, see our real estate investment financing guide and consulting services.