Key Takeaways
- Always compare total project cost across lenders, not just rate or points in isolation.
- The lowest rate does not always produce the lowest cost—points, terms, and rehab funding matter.
- Cash-required vs. total-cost is the fundamental trade-off in hard money lender selection.
- Fix-and-flip profitability is highly sensitive to carrying costs, making project timeline the critical variable.
This case study walks through a complete hard money-financed fix-and-flip project, from lender selection through loan payoff, illustrating how term sheet differences affect project profitability.
Project: 3BR Ranch — $185,000 Purchase, $60,000 Rehab
Lisa identifies a 3BR/1.5BA ranch home listed at $185,000 that needs $60,000 in renovations. Comparable renovated homes sell for $310,000-$325,000 (ARV estimate: $315,000). She needs $245,000 total to complete the project and plans a 6-month timeline. She solicits term sheets from three hard money lenders to compare total project cost.
Comparing Three Hard Money Term Sheets
The three lenders offer meaningfully different terms that affect total project cost by tens of thousands of dollars.
| Term | Lender A | Lender B | Lender C |
|---|---|---|---|
| Loan Amount | $222,750 (90% PP + 100% rehab) | $203,500 (80% PP + 75% rehab) | $185,000 (100% PP only) |
| Interest Rate | 12% | 11% | 10% |
| Points | 3 ($6,683) | 2 ($4,070) | 4 ($7,400) |
| Term | 12 months | 12 months | 9 months |
| Extension | $500/month | 1 point | None |
| Draw Process | 4 draws, 10% holdback | 3 draws, no holdback | No rehab funding |
| Cash Required | $22,250 + closing | $41,500 + closing | $60,000 rehab + closing |
| 6-Month Interest | $13,365 | $11,193 | $9,250 |
| Total Loan Cost (6mo) | $20,048 | $15,263 | $16,650 |
Hard money term sheet comparison for $245K total project cost
Analysis and Selection
Lender A requires the least cash out of pocket ($22,250) but costs the most ($20,048 over 6 months). Lender B offers the lowest total cost ($15,263) but requires $41,500 in cash. Lender C requires the most cash ($60,000 for rehab) despite having the lowest rate, because it does not fund renovation costs. Lisa selects Lender B as the optimal balance of cash required and total cost. Her total project economics: Purchase $185,000 + Rehab $60,000 + Carrying costs (interest $11,193 + points $4,070 + taxes/insurance $3,000 + utilities $1,200) + Selling costs (6% commission + $3,000 closing = $21,900) = $286,363 total cost. Sale at $315,000 yields gross profit of $28,637, a 22% return on her $41,500 cash investment over 6 months (44% annualized).
Key Takeaways
- ✓Always compare total project cost across lenders, not just rate or points in isolation.
- ✓The lowest rate does not always produce the lowest cost—points, terms, and rehab funding matter.
- ✓Cash-required vs. total-cost is the fundamental trade-off in hard money lender selection.
- ✓Fix-and-flip profitability is highly sensitive to carrying costs, making project timeline the critical variable.
Sources
Common Mistakes to Avoid
Starting a flip without a detailed scope of work and contractor bids
Consequence: Undefined scopes lead to change orders, cost overruns, and blown timelines that eat into the hard money loan term
Correction: Complete a detailed scope of work with line-item bids from at least two contractors before closing on the property
Not budgeting for holding costs beyond the planned rehab timeline
Consequence: A 3-month project overrun on a 12% hard money loan adds 3% of the loan amount in interest alone
Correction: Budget 2-3 extra months of carrying costs as a contingency and include extension fees in your worst-case scenario analysis
Test Your Knowledge
1.In a fix-and-flip deal, what metric best determines whether hard money is cost-effective?
2.What is the most critical risk factor in a hard money fix-and-flip project?
3.What percentage of ARV do most hard money lenders limit their total loan commitment to?