The GAP

What is the GAP? When a lender makes a secured loan for a fix and flip project, they typically lend up to the value of the security/collateral. Up to the value of the collateral, MINUS two very important pieces;

1. The cost of foreclosing on, and liquidating, the collateral to recover the funds loaned out.

2. Enough “skin in the game” from the borrower, to make sure that they don’t abandon the project if the going gets tough.

Typically this GAP, between the value of the property / collateral and the amount of the loan, is a percentage of the Purchase Price (10% - 20%), which the borrower provides at the time of purchasing the property.