SBA rules · SOP 50 10 8.1
Can an SBA loan finance building homes for sale or house flipping?
Generally no, but the 7(a) Builders CAPLines program provides a specific exception that allows eligible contractors to finance spec home construction and substantial residential rehabilitation for resale.
Quoted from SBA SOP 50 10 8.1Every quote checked word for word
In detail
- Prohibition on speculation: Speculative businesses are ineligible, prohibiting loans for purchasing and holding an item until the market price increases or for building homes for future sale without a sales contract in place. Building a home under contract with an identified purchaser is considered non-speculative and eligible.
- Use of proceeds restriction: Standard SBA loan proceeds cannot be used for investments in real property acquired and held primarily for future development, sale, lease, or investment, with an explicit exception for small contractors under the Builders CAPLines program.
- Speculative home construction: Construction of homes for future sale with no sales contract in place (spec homes) is eligible only under the 7(a) Builders CAPLines program.
- House flipping and rehabilitation criteria: Under Builders CAPLines, a small general contractor or homebuilder may finance the prompt and significant rehabilitation of residential property for resale if the contractor demonstrates profitable experience and performs or manages on-site supervision. The cost of renovation must be more than one-third of the purchase price or fair market value.
- Program restrictions: Builders CAPLines proceeds may not be used to buy vacant land for possible future construction, operate or hold rental property for future rehabilitation, or refinance existing debt, and the ultimate disposition must be an arm's-length sale to an unaffiliated third party.
The source
What the SOP says
“Building homes for future sale (except under the 7(a) Builders CAPLines program). Note: Construction of homes for future sale with no sales contract in place (spec homes) is eligible under the 7(a) Builders CAPLines program.
“Investments in real or personal property acquired and held primarily for future development, sale, lease, or investment (except for a loan to an Eligible Passive Company or to a small contractor under the Builders CAPLine program).
“Builders CAPLines provide financing to small general contractors to construct or rehabilitate residential or commercial property for resale. This program provides an exception under specified conditions to the general rule against financing investment property.
“Renovations must be “prompt and significant.” Construction must begin within a reasonable time after loan approval and the cost of renovation must equal or exceed one-third (1/3) of the purchase price of the property.
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This page quotes the SBA's Standard Operating Procedure 50 10 8.1. Lenders can ask for more than the SBA minimum. It is general information, not a loan approval or legal advice.