If you’re planning your first residential rehabilitation or construction project in California, you certainly picked the right state.
Although sale prices have fluctuated significantly during the pandemic era, California real estate remains one of the most reliable investments on earth.
The median price of an existing single family home in California increased 123% in the 10 years between January 2013 and January 2023 according to the California Association of Realtors, rising from $336,650 to $751,330.
It’s a competitive market for investors, but there’s still plenty of opportunity for experienced real estate operators who can work efficiently. And that starts with securing affordable, right-sized financing to fund the project.
Let’s break down what makes California a unique environment for house-flippers, and what you should know before applying for a construction loan.
By the way: Bay Eleven specializes in helping California real estate investors secure residential transition loans and other construction financing. Please fill out our apply form when you’re ready to go over your options with one of our funding experts.
What makes California the best state for real estate renovation projects?
As the old saying goes, “Buy land, they’re not making more of it.” That’s especially true in California, where inventory is limited by geography.
“If you look at the Los Angeles, San Diego, San Francisco, and Orange County metro areas, there’s the ocean on one side and mountains on the other,” says Bay Eleven Founder Michael Marshall. “Undeveloped land is basically non-existent. Your options in California are to take existing properties and fix them up, rebuild them, or build vertically. That makes every property in the state an incredibly valuable asset.”
Scarcity always comes at a cost. California’s median home price is second only to Hawaii among the 50 U.S. states, which means an investor can fix up a house and potentially sell it for a tremendous amount of money. According to recent studies, the average house-flipper in California can net $100,000 in profit or more per project. In other parts of the country, the average market rate for houses is much lower, which limits your potential profit.
In addition, California’s foreclosure laws are very favorable to investors, relative to the rest of the country. The average time to foreclose is just 6-9 months in California, compared to four years for New York State. That means Californian investors have greater access to foreclosed homes, allowing them to buy in at a low price.
Investors on the East Coast typically receive less favorable terms than out West. In our experience, California-based lenders offer lower liquidity requirements, lower credit score requirements, and higher potential funding amounts relative to the value of the home.
Are there any licensing requirements or special laws that real estate investors should be aware of?
It always makes sense to start an LLC for your real estate investment business, but outside of that, there aren’t any licensing requirements in California for residential real estate investment. You don’t need a real estate license or a contractor’s license to flip houses in the state. That being said, it’s a big advantage if you do have them.
Having a real estate license means you can avoid agent fees when you buy and re-sell a house, allowing you to keep more of your profit. A real estate license will also allow you to access the Multiple Listing Service (MLS) database to find ideal investment opportunities.
Similarly, having a contractor’s license means you can manage the project on your own, saving you even more money.
In terms of California law, house-flipping is perfectly legal unless you’re actively trying to cheat someone out of money. For example, colluding with an appraiser to falsely inflate the value of a home violates California’s fraud laws. If you want to avoid hefty fines and prison time, please play by the rules.
What funding options are available in California?
Real estate investors can secure construction financing from a wide range of institutional lenders (such as banks and mortgage lenders) or online lenders. While banks can provide lower interest rates, their steeper criteria for approval makes the process slower. Even in a best-case scenario, processing and approval takes weeks with a traditional bank.
That being said, all lenders will offer some variation of the same set of financing products. When you apply for funding in California, you will likely be offered some mix of the following:
Residential transition loans (aka fix-and-flip loans): A loan secured by a mortgaged house property, with the funds intended to cover the costs of renovating and reselling the property.
Bridge loans: A short-term real estate loan that allows you to acquire another property before the one you’re currently renovating has been sold.
Ground-up construction loans: Short-term financing specifically for projects that involve building a new structure on an empty lot or making significant horizontal or vertical additions to an existing house.
Long-term rental financing: A loan used to fund the purchase and improvement of multi-family rental properties, with the funding amount based on the property’s net operating income compared to the amount of money required to pay the debt.
For more information on real estate construction financing, visit our Funding Options page.
What are the steps that borrowers should take to secure residential financing in California?
Before you submit any information to a lender, spend a few minutes doing some basic due diligence on the company. At minimum, check out the Better Business Bureau website to see if the lending company has a significant number of complaints.
Once you’ve found a reputable lender, you can submit an initial application that contains your name, email address, phone number, credit bucket, project state, investment type (e.g., fix and flip, ground-up, rental) and desired loan amount.
If the initial application meets the lender’s requirements, the lender will contact you and ask you to fill out an application that allows them to pull a credit report and background check. You and the lender will then work through the deal structure, which can be done relatively quickly.
After that, the loan goes into process and an appraisal will be ordered. Then, the loan goes into underwriting, and ultimately funding. The lender will want to see your proof of liquidity, any entity documents if applicable, proof of insurance, and permits if applicable.
If you’re approved, you’ll be presented with a number of different funding options, based on your qualifications and the lenders’ product offerings. You are under no obligation to accept any of them; in fact, it’s always a good idea to compare offers from a few different lenders before making a decision.
During this consideration stage, you should ask the lending team about the level of service they offer. Rates and loan products can be pretty similar from lender to lender. But ideally, the funding team should be available to answer questions and provide guidance through the entire course of the loan.
Once you’ve signed the paperwork and submitted your down payment, funds are generally released within 24 hours.
Getting started with construction funding in California
So, do you have a house renovation project in California that you need to get over the finish line? We can help. Bay Eleven has 50+ combined years of experience in helping house-flippers all across California, and we’re always looking for experienced investors to work with.
Fill out the form on our apply page and a member of our funding network will get back to you ASAP to get the ball rolling. If you have a quick question, you can reach Bay Eleven’s founders at info@bayeleven.com. Talk to you soon!