Distressed properties can provide an opportunity for a bold real estate investor to lock in profit on the front end of a real estate project.

Most real estate investors interested in purchasing distressed properties at below market vale have considered purchasing at a foreclosure auction. The potential to make an impressive profit exists, but so does the potential to inherit major issues that can jeopardize the whole project.

Real estate investors generally prefer to use financing for their deals in order to maximize their leverage, liquidity and the amount of concurrent deals they are able to do, but financing for foreclosure auctions isn’t available. Cash only.

Hard money lenders cannot directly fund foreclosure auction purchases

Some borrowers incorrectly assume hard money lenders are able to provide direct funding for a purchase at a foreclosure auction. This isn’t the case. Hard money loans need to be secured by real estate. A lender can’t simply write the borrower a check. To secure a loan against a piece of real estate the transaction must go through the escrow process.

Private lenders also require that the transaction has title insurance to ensure there are no existing liens on the property that could jeopardize the lender’s position.

Escrow and title insurance are not available at foreclosure auctions. Winning bidders submit a cash payment and they become the new owners of the property.

Foreclosure auctions require all cash

Foreclosure auctions require cashier’s checks for an all cash purchase. Auctioneers require bidders to show the amount of cashier’s checks they have prior to bidding at the auction. Financing options are not available.

While directly funding foreclosure auction purchases with hard money loans is not available, there are a few hard money strategies to consider:

Hard Money Strategy #1 – Purchase with all cash, then cash out refinance

If the real estate investor has enough cash, they can purchase with all cash and then do a hard money cash out refinance. This lets the real estate investor acquire the property and then quickly raise cash to increase liquidity.

Hard Money Strategy #2 – Hard money cash out refinance against existing property

If a real estate investor has equity in property they currenty own, they can take out a hard money loan against the property to raise funds for all cash auction purchase. After the auction purchase is finalized, the real estate investor can arrange financing on the newly purchased property

Hard Money Strategy #3 – Find REOs at Real Estate Auction Websites

Online auction sites for real estate such as Hubzu.com and Auction.com list foreclosure sales. The also list bank owned properties which are commonly known as REOs. REOs are properties that failed to sell at the foreclosure auction (trustee sale) at which point the property goes to the bank (lender).

It's not uncommon for the seller of the REO property to require all cash, but some sellers may consider certain types of financing (hard money lending, conventional, FHA). Hard money loans are the most commonly accepted type of financing for this situation.

Hard money lenders are able to providing funding for loans much faster and with fewer issues than traditional bank lenders. This is why hard money financing may be accepted while other types of financing are not.

The auction company should be contacted directly to determine if the seller will accept any type of financing for the specific piece of real estate. The type of financing allowed may vary from property to property.

Full article available at North Coast Financial: https://www.northcoastfinancialinc.com/3-hard-money-loan-strategies-foreclosure-auctions/