If you work with house flippers, a lot of your deals will be financed with hard money. Your client may describe it in one sentence ("my lender does ninety percent of purchase and all of the rehab"), but that sentence hides a lot of moving parts: how the loan is sized, when the rehab money actually shows up, what the points and interest cost, and what the lender needs from everyone before closing.
You do not need to be a loan officer. But agents who understand hard money write cleaner offers, set realistic closing dates, and catch financing problems before they become contract problems.
It is education, not lending, legal, or tax advice. Loan terms vary widely by lender, borrower experience, property, and market, so your client's lender is always the source of truth for their actual terms.
What a Hard Money Loan Is
A hard money loan is a short-term loan from a private or non-bank lender, secured by the property itself. For flips, it usually funds some or all of the purchase plus some or all of the renovation, and it is meant to be paid off when the house sells or is refinanced.
The key difference from a typical owner-occupant mortgage is what the lender underwrites. A conventional loan leans heavily on the borrower's income and long-term ability to pay. A hard money lender focuses mainly on the deal: the purchase price, the rehab plan, the expected after-repair value (ARV), and the exit. The borrower's experience, credit, and cash on hand still matter, but the property and the plan carry more weight.
Hard money loans for flips are generally business-purpose loans on investment property. They are not meant for a house the borrower plans to live in.
How Hard Money Lenders Size a Loan
This is the part that matters most for your offers. Lenders commonly look at the deal a few different ways and lend the most conservative result.
Loan-to-cost
Loan-to-cost compares the loan to the total project cost, which is usually the purchase price plus the rehab budget. A lender might fund a percentage of the purchase and a percentage of the rehab, with the borrower bringing the rest.
Loan-to-ARV
Many lenders also cap the total loan at a percentage of the after-repair value. If the ARV is weak, this cap can shrink the loan even when the purchase and rehab numbers look fine.
What this means for you
Two things follow directly.
First, ARV is a financing number, not just a profit number. If you help your client support ARV with solid comps, you may be helping them get the loan they need. If ARV is stretched, the lender's valuation may come back lower and the loan amount may drop, which means your client needs more cash to close or needs to renegotiate.
Second, the leverage your client was quoted is not guaranteed on every deal. Advertised leverage is usually for the best borrowers on the best deals. A first-time flipper, an unusual property type, or a property with thin comps may get less.
An illustrative example
These numbers are made up to show the mechanics, not to represent any lender's terms:
- Purchase price: $200,000
- Rehab budget: $50,000
- Total project cost: $250,000
- Expected ARV: $340,000
Suppose a lender will fund up to 85% of total project cost and caps the loan at 70% of ARV.
- 85% of $250,000 is $212,500.
- 70% of $340,000 is $238,000.
The lower figure controls, so the maximum loan in this example is $212,500. The client needs the other $37,500 of project cost, plus closing costs, points, interest, and holding costs, from their own funds or another source.
Now suppose the lender's valuation puts ARV at $290,000 instead. 70% of $290,000 is $203,000, so the ARV cap now controls and the client needs more cash than they planned. That is why a realistic ARV matters before the offer goes out, not after the appraisal.
How Rehab Draws Work
Rehab money on a hard money loan usually does not arrive at closing. It is commonly held back by the lender and released in draws as work is completed.
A typical flow looks like this:
- The borrower submits a scope of work and budget before closing.
- At closing, the lender funds the purchase portion. The rehab portion is held back.
- The contractor completes a phase of work, often paid up front by the borrower or contractor.
- The borrower requests a draw. The lender sends an inspector or asks for photos to confirm the work.
- The lender releases money for the completed work, sometimes minus a fee.
The practical result is that your client needs working capital to keep the job moving between draws. A flipper who is fully stretched at closing can get stuck mid-rehab, which is one reason a solid rehab estimate and a clear scope of work matter so much.
For you, slow inspections or draw approvals can push back the finish date, so ask where the job is in the draw schedule before you plan the resale listing.
Points, Interest, and Fees: Why Financing Changes the Offer
Hard money usually costs more than a conventional mortgage. The common pieces are:
- Points: an upfront fee, expressed as a percentage of the loan amount, typically paid at closing.
- Interest: often interest-only during the loan term, charged on the outstanding balance.
- Fees: underwriting, processing, appraisal or valuation, draw inspection, and other fees, depending on the lender.
All of these are costs of doing the deal, and they reduce what your client can afford to pay for the property. That is exactly why financing belongs in the maximum allowable offer calculation. A cash buyer and a hard money buyer with the same profit target may arrive at different maximum offers on the same house.
Financing costs also grow with time. Every extra month of rehab or time on market adds interest and other holding costs. When you price the resale or advise on timing, remember that your client is often paying for every month the house sits.
Where Hard Money Shows Up in Your Transaction
Even though the loan is your client's business, it touches your part of the deal in several places.
Writing the offer
- Proof of funds and pre-approval. Many hard money lenders can issue a letter or term sheet for a specific property. Ask your client what their lender can provide and how fast.
- Financing contingency and timelines. Hard money can often close faster than a conventional loan, but not instantly, since the lender still needs a valuation, title work, insurance, and the scope of work. Set closing dates your client's lender has actually confirmed.
- Appraisal or valuation risk. If the lender's value comes in low, the loan amount may shrink. Talk with your client about how they would handle that before you write the offer.
Before closing
- Access for the lender's valuation. Help coordinate access for the appraiser or inspector, especially on vacant or off-market properties.
- Insurance. Lenders typically require insurance appropriate for a vacant property under renovation. Clients sometimes learn this late. A good insurance contact is one of the relationships that makes you the go-to agent for house flippers.
- Title and entity. Many flippers buy in an LLC or other entity. Confirm early how the client is taking title so the contract, the loan, and the title work all match.
During the rehab and resale
- Timeline check-ins. Ask about draws and the loan maturity date. A loan that matures before the planned sale date, with extension fees if it runs over, is a pricing and timing problem you want to know about early.
Questions Agents Should Ask Flipper Clients About Their Financing
Add these to your intake conversation and your notes on each client's buy box:
- Are you paying cash, using hard money, private money, or a mix?
- Who is your lender, and have you closed with them before?
- What percentage of purchase and rehab do they typically fund for you, and is there an ARV cap?
- Can your lender issue a letter for a specific property, and how quickly?
- How many days does your lender usually need to close?
- How do your rehab draws work, and how much working capital do you keep on hand?
- What is your typical loan term, and what happens if you need an extension?
- Are there property types or conditions your lender will not finance?
When the Financing Kills the Deal
Sometimes the numbers work for a cash buyer but not for a buyer paying hard money costs. Sometimes the lender's valuation comes in low and the client cannot cover the gap. When that happens, the most useful thing you can do is say so early and clearly. Telling a flipper a deal doesn't work protects the relationship far better than pushing a deal that strains their cash and their lender relationship. Then look for deals with more margin, such as off-market opportunities.
FAQ
Do real estate agents need to understand hard money loans?
You do not need to underwrite them, but understanding the basics helps you write realistic offers, set closing dates your client's lender can meet, and spot financing problems early. For agents who want flipper clients, it is part of speaking their language.
How is a hard money loan different from a conventional mortgage?
A hard money loan is short-term, usually costs more, and is underwritten mainly on the property and the flip plan rather than primarily on the borrower's income. It is typically used for investment property, not a home the borrower will live in.
Why does ARV matter so much to hard money lenders?
Many lenders cap the loan at a percentage of after-repair value. If the lender's ARV is lower than your client expected, the loan amount can drop and the client may need more cash to close.
Should an agent recommend a hard money lender?
You can share contacts your clients have had good experiences with, but follow your brokerage's policies on referrals and any disclosure rules in your state, and encourage clients to compare terms in writing.
Soft next step
Flip Engineers helps agents become the go-to agent for flippers and developers in their market, including understanding the deal math and financing their clients rely on. If you want help building that skill set and the systems around it, book a call.