(312) 270-1618 How do I estimate my cash to close on a fix and flip loan?
Estimated reading time: 4 minutes.
Post outline
What is estimated cash to close?
Estimated cash to close is an estimate of how much cash you (the borrower) will need to bring to the closing table to close your fix and flip loan.
It is important to clarify that this amount is different from a “liquidity requirement” that a lender might enforce during underwriting. A liquidity requirement often takes into consideration the loan after it closes, whereas the estimated cash to close does not.
The estimated cash to close on a fix and flip loan can be very simply calculated:
Closing costs – Closing loan = Estimated cash to close
However, the closing costs total amount consists of many factors that you will need to consider to obtain a complete and accurate calculation.
Additionally, calculating the closing loan can sometimes be more difficult than it first appears due to how many fix and flip lenders fund.
We’ll discuss both in detail to allay any fears or confusion.
Closing costs
Closing costs are all the costs involved at the closing time for the loan.
Here is a list:
- Purchase price of the investment property
- Origination fees
- Legal fees
- Title fees
To get the total closing costs, you would simply sum the costs above.
Here’s a quick example:
Purchase price: $250k
Origination fee: 2%
Legal fees: $1,500
Title fees: $500
In this case, the total closing costs would be:
$250,000 + $5,000 + $1,500 + $500 = $257,000
The overarching point to remember is that your closing costs, for the purpose of calculating your estimated cash to close are your costs involved in closing the loan.
Closing loan
The closing loan amount is the second number we need in order to calculate your estimated cash to close on a fix and flip loan.
The closing loan amount is different than the total loan amount in that the closing loan amount does not include the rehab portion of the financing.
Let’s take the following example…
Purchase price: $100,000
Rehab amount: $50,000
ARV: $225,000
Total loan amount: $127,500
Closing loan amount: $77,500
Rehab holdback: $50,000
As you can see, the closing loan amount is quite a bit different than the total loan amount. In the above example, the fix and flip lender is financing 100% of the rehab on a reimbursement basis. This is quite typical in a fix and flip loan, and it means that you will need to complete a portion of the construction before that amount is reimbursed. As such, the $50,000 of rehab financing is “held back” by the lender, and portions of that $50,000 are released as the scope of work continues to be completed.
Putting it all together
We’ve now discussed the two numbers that you need in order to accurately calculate your estimated cash to close, the closing costs and the closing loan. Now, it’s simply a matter of putting them together.
Let’s use one final example to see how you would calculate your estimated cash to close.
Purchase price: $200,000
Rehab amount: $50,000
ARV: $350,000
Origination fee: 3%
Legal fees: $2,000
Title fees: $750
Total loan amount: $200,000
To calculate our closing costs, we’ll go ahead and add the following:
$200,000 (purchase price) + $6,000 (origination fee) + $2,000 (legal fees) + $750 (title fees) = $208,750
Let’s assume that the fix and flip lender will finance 100% of the rehab on a reimbursement basis.
To calculate our closing loan, we’ll subtract the rehab financing amount from the total loan amount:
$200,000 (total loan amount) – $50,000 (rehab amount) = $150,000
Now, let’s get our estimated cash to close by subtracting our closing loan from our closing costs:
$208,750 (closing costs) – $150,000 (closing loan) = $58,750 = estimated cash to close
Conclusion
Calculating your estimated cash to close can be very helpful when you are thinking about how much money you will need to bring to the closing of a loan.
To calculate your estimated cash to close, you need to know what the closing costs are, and also what the closing loan amount is.
Then, you can figure out your estimated cash to close by subtracting the closing loan amount from the closing costs.
Do you need financing for a current or upcoming fix & flip?
If so, you can fill out our preliminary application at this link to get started.