Darren is a house flipper in Saginaw, MI. He discovers an older property for sale in the Saginaw Township North area and decides to renovate it and resell it for a profit. The property costs $340,000 but he doesn't have the full amount so he obtains a private money loan with Green Square Investment Corporation. The terms of the loan include a 75% loan-to-value (LTV), so he must contribute 25% of the price as cash at closing, which makes the principle note amount $255,000. The deal also consists of the following features: 1) a 12 month length, 2) a 8% interest only note, and 3) a one point origination fee.
By the terms of the loan, Darren will have to contribute a $2,550 origination fee in addition to 25% of the purchase price, or $85,000, since there is a 75% LTV. Green Square Investment Corporation will collect $1,700 in monthly interest payments from the borrower. This is computed by taking the full loan amount of $255,000, multiplying that by the 8% interest rate, and then dividing that amount by 12. Darren's intention is to finish the renovation within the 12 months and resell it for $425,000. If he succeeds he will earn a total profit of $62,050 ($425,000 price - $255,000 principle - $85,000 funds brough to closing - $2,550 origination points - $20,400 in interest.