Vickie is a house flipper in Graham, NC. She finds an older property and wants to remodel it and resell it for a profit. The property has a cost of $160,000 but she doesn't have the full amount so she takes a hard money loan with Yellow Sun Investment Company. The lender agrees to write a loan with a 75% loan to value (LTV) so they are willing to loan $120,000 on the project. The terms of the loan dictate a 9% note for 6 months. They also stipulate a 2 point origination fee, that will also have to be paid at closing.
The borrower must bring a total of $32,400 upon closing to pay the $40,000 down payment in addition to the $2,400 origination fee. Once the deal is closed and Vickie takes over the project, she will begin making payments each month of $900 to the lender ($120,000 principle x 9% / 12 months). At the expiration of the loan, she sells the rehabed property for $240,000. After subtracting the $5,400 in interest payments ($900 times 6 months), the $2,400 origination fee, the $120,000 principle amount on the loan, and the $40,000 she contributed to the closing, she will earn a gross profit of $72,200 ($240,000 sales price minus $167,800 in costs). This profit would then be reduced by any rehab costs paid by the borrow.