One Person’s Lifeline, Another’s Bailout – The Challenges of Mid-Project Renovation Financing

Embarking on a home flipping venture can be a thrilling but unpredictable ride, where unforeseen challenges can transform a dream project into a financial puzzle.  When the you know what hits the fan, your timeline can take a hit.  The problem comes when your new timeline does not match up with your loan terms and you need to refinance.  This need for mid-project renovation financing would seem a simple ask if not for the fact that most lenders disdain this type of loan.  They call them bail out loans and if you think the name tells you something about there appetite to approve these loans, you are right.  Because you may find yourself in need of bailout, or as I like to describe it, rescue, let’s explore scenarios where obtaining additional funding becomes a lifeline for investors facing hurdles, how lenders might view these situations as potential bailouts and how to secure rescue financing.

Structural Surprises and Project Scope Changes

When structural or unforeseen issues emerge, the project’s scope can expand, leading to increased costs, time, and the need for additional contractor support. This is usually caused by big scope items with large price-tags not considered by the investor.  They are also often from project aspects that could not be identified during an inspection because they are behind walls.  Think of how much added cost could come from the need to completely re-plumb and/or rewire a home?  Imagine finding structural issues when knocking down a wall to combine two rooms?  The costs can add up and investors grappling with these challenges may find themselves in a financial bind, seeking funding to navigate through unexpected twists.

Investor-Initiated Changes Impacting Progress

Sometimes the issues are not in-between the walls of the property but rather between the ears of the investor.  Major or multiple changes deemed necessary may make alter the project mid-stream, introducing delays and cost overruns.  The plan gets left in the dust as everything from floorplans to fixtures change due to whim.  These self-inflicted changes, while well-intentioned, can strain financial resources and prompt the need for additional funding to keep the project afloat.

External Delays from Inspectors and Agencies

Most, if not all, fix-and-flip projects will require permitting and inspections.  Some may require variances needing multiple layers of approval.  As an investor, you are at the mercy of municipality process requests in a timely manner.  This of course assumes that the investor thoroughly researched and abided by the required processes and provided the required documentation.  Even when everything is done correctly, challenges can and do arise.  These unforeseen delays caused by inspectors or external agencies can stall progress. Investors caught in this bureaucratic web may require additional funds to bridge financial gaps caused by prolonged timelines and unexpected expenses. Permitting

Scarcity of Subcontractors and Unreliable Contractors

While they may do some of the work, most investors depend on sub-contractors for their project.  This would seem a simple task but simple does not mean easy.  In boom times, contractors become hard to secure.  They have more projects than they can handle, so they gravitate to large projects that will keep them busy for longer periods of time for clients that they have the best relationships.  Investors can find themselves in line behind other clients with a ticking clock.  This can lead an investor to lower their bar and hire less dependable and capable contractors.

I have not yet met the person who does not think that there are more bad contractors than good.  Even the contractors that I know think this.   Lack of available subcontractors or undependable contractors who start but don’t finish work on time can create project bottlenecks. Investors facing such setbacks might need additional funding to secure reliable help or bridge financial gaps caused by stalled progress.

Building Material Availability and Cost Fluctuations

Building materials do not magically appear at a project.  A lot goes into the acquisition of building materials for a project and a lot of things can cause he need for a rescue.  Raw materials often come from across the globe and disruptions in the transportation process create shortages and delays.  Real estate booms also create delays and shortage when there are literally not enough materials to meet all of the construction needs.  As you could surmise, it is not uncommon for investors to face material driven shortages and sometimes additional funding to offset increased project costs and maintain project viability.

Overcoming the Challenge

From a lender’s standpoint, stepping in with additional funding can be viewed as a bailout. Assessing the added risk becomes crucial, as unforeseen challenges may have altered the project’s dynamics. Lenders must carefully weigh the merits of the deal against the increased risk, potentially leading to a decline even if other aspects of the deal appear promising.  Even when the circumstances support your case that the need to be rescued was not due to bad planning or execution on your part, the perceived risk associated with coming to the rescue is not worth the potential profit.  Anecdotally, a single digit percentage of mid-project renovation loans make it to funding.

To make it into that small number of lucky investors, you need to be able to make a strong case that the need was not due to anything that you did project.  Think of it this way. You want to clearly show that the need is from extenuating circumstances, such as macroeconomic conditions and acts of God.  Even then, you want to show that you planned for such contingencies and that they were so severe that they exceeded your planning ranges and the need is truly a rescue and not a bailout.  I say all this a bit tongue-in-cheek, but it is to make the point that they are basically investing in you and the project and need to be sure that you know what you’re doing.  If this worries you, it should.  Hope for your business, however, is not lost.  Refinancing is not the only option.  As Yoda said “There is another.”  This option is more effective but less obvious.

There is a saying that an ounce of prevention is worth a pound of cure and the wisdom definitely applies here. The best way to not need mid-project renovation funding is to work with a good lender that will work with you to avoid needing to refinance or that will refinance your loan.  These types of loans are very different than the conventional loans that most people are familiar with.  The latter is often times serviced by organizations with no connection to your application process.  Additionally, their ability to work with you on loan issues are, like the application process, limited by strict regulations that remove any subjectivity.  Because of this, there is more parity among the lenders.

In the fix-and-flip world, lenders are much more connected with you both during the loan process and post-close.  Many times, they are servicing the loan and can, therefore, make decisions regarding your loan terms and changes to them.  They can make common sense decisions that would look subjective in the conventional world.  This does not mean that they will, but that they could and this is where your deliberate choice on lender becomes so important.  If they are good partners from pre-sale to close, there is a good chance that they will be equally collaborative post-close.  My recommendation is have the discussion about how they approach this at the start.  Because typically a single digit percentage of mid-project renovation loans make it through, it is best to stay out of that statistic by choosing the right lender.  Sometimes the better upfront pricing can be costly later on with inflexible, uncooperative lending partners.

Don’t depend on a bailout when you need rescuing

In the world of home flipping, unexpected challenges can turn a promising project into a stressful burdens that the you just want to get across the finish line at break-even.  Sometimes this requires a new loan in the middle of the project.  Investors seeking this additional funding often find themselves at a crossroads and lenders must carefully evaluate the associated risks. Navigating these scenarios requires strategic decision-making to turn potential bailouts into calculated lifelines for a successful home flipping journey