A term sheet is an opinion about a deal we have not fully seen yet. It says that based on what you told us, the structure works. Everything after that is verification, and verification is where deals die. We issue terms on files that never close, and it is almost never about pricing. It is about the six things below.
Title Problems Nobody Looked For
Title is the single most common reason a flip stalls after terms. An old mortgage that was paid but never released. A municipal lien for an unpaid water bill from two owners ago. A deceased seller and an estate that has not been probated. A contractor lien from a renovation that was abandoned in 2019. None of these show up in the listing.
The frustrating part is the timing. Title comes back late in the process, which means you find the problem when you have already spent money on an appraisal and set a closing date. Some of these clear in a week. Probate does not clear in a week.
Order title the day you go under contract, not the day you submit to a lender. If you are buying from a wholesaler, ask who has title and whether a commitment already exists. If the answer is vague, treat that as information about the deal.
A Budget That Does Not Match the Scope
We see a lot of budgets that are really just a number. Seventy thousand dollars for a full rehab, no line items, no contractor bid, no allowance for permits. That budget is a guess wearing a suit.
The problem is not that we distrust the number. It is that we fund rehab through draws against completed work, and a draw schedule needs line items to draw against. If the budget says kitchen and nothing else, there is no way to release funds in stages that match what the crew actually finished.
The other failure mode is a budget that contradicts the photos. The scope says cosmetic refresh and the interior photos show missing drywall and an open ceiling. Underwriting will catch that, and when it does we have to re-cut the whole structure. Rebuilding a file mid-process costs you two weeks you did not plan for.
Bring a line-item budget with a contractor name on it. Room by room, material and labor split where you can. It does more for your credibility than a resume.
The Appraisal Disagrees With Your Plan
Your after-repair value is a thesis. The appraiser tests it. When the appraised ARV comes in under the number in your spreadsheet, leverage moves, because Fix & Flip proceeds are capped at 75% of after-repair value, subject to underwriting. A lower ARV means a smaller loan, and a smaller loan means you bring more cash.
Illustrative only: a borrower plans a $550,000 ARV and the appraisal supports $500,000. At a 75% cap, supported proceeds drop by $37,500. That is real money to find on short notice, and most borrowers do not have it sitting idle.
We are not trying to talk you out of an aggressive ARV. We are saying know your number if the appraisal comes in five or ten percent light, and know it before you sign a contract with a hard closing date. If the deal only works at the top of the comp range, the deal is thin.
Cash to Close That Is Not Actually Liquid
Borrowers regularly tell us they have the cash and then cannot document it. The money is in a business account that belongs to a partner. It is in a retirement account that takes three weeks to liquidate. It is coming from the sale of another property that has not closed. It is a loan from a family member with no paper.
Proof of funds means seasoned, accessible, and yours. Two months of statements for the account the wire will come from. If a partner is contributing, we need to see the partner and the entity structure, not a verbal arrangement.
A specific version of this that we decline: the borrower who needs the property to appraise high enough to eliminate their own contribution. If the entire down payment depends on maximum leverage, there is no cushion for anything. We would rather see a smaller deal with a real cash position behind it.
Contractor Changes in the Middle of the File
The contractor who bid the job is not the contractor who shows up. It happens constantly and it always costs time. The new bid is different, the scope shifts, the draw schedule has to be rebuilt, and sometimes the number moves enough that the leverage changes.
Worse is when nobody tells us. We find out at the first draw inspection that the work being done is not the work we underwrote. At that point we have to re-approve a scope that is already half built.
If your contractor changes, say so the day it happens. A revised budget submitted early is a small adjustment. The same revision discovered at inspection is a problem.
Entity Documents That Do Not Match the Borrower
We lend to entities for business-purpose deals. The operating agreement needs to name the people who are actually signing, the entity needs to be in good standing in the state where it was formed, and if the property is in a different state, it may need to be registered there too.
The recurring mess is an LLC formed last week with a generic operating agreement that lists one member while two people are on the application. Or an entity whose registration lapsed because nobody filed the annual report. Or a contract assigned to a personal name while the loan is going to an entity.
Pull your documents before you submit. Articles, operating agreement, EIN letter, certificate of good standing. It takes an hour and it removes an entire category of delay.
What to Have Ready Before You Submit
Purchase contract with all addenda. Title commitment or the title company contact. A line-item rehab budget with a contractor attached. Interior and exterior photos. Two months of statements for the account funding your contribution. Entity documents. Your exit, written in one sentence, with a number and a date.
That package will not make a bad deal good. It will stop a good deal from dying for reasons that have nothing to do with the property.
Continue Reading