Hands-on real estate investors have been buying distressed properties for a quick profit for a very long time. Over the years, investors fine-tuned their methodologies, when it became quite apparent that the use of hard money was easily accessible and came with reasonable loan parameters regarding the working capital required to accomplish their investment objectives.
Generally speaking, real estate investors generate their anticipated profits from:
- Sweat equity, which helps build value and reduce the home’s Loan-to-Value
- Buying an underpriced house
- A bit of luck, or
- Even personal intuition as to an upcoming upgrade to a neighborhood or town.
The real estate market categorizes distressed properties into three primary types -a Short Sale, a Foreclosure, and a Real Estate Owned property. Each type of distressed property comes with unique benefits and risks that differ from the others. Hard money borrowers that are considering jumping into the distressed property pool must assess the specific risks and benefits before making a final purchase decision.
Purchasing an Auctioned Foreclosure
A foreclosed property that is bought from a public sale/auction occurs when the highest bidder has the opportunity to buy the property. Foreclosure sales usually have many competitive bidders, one of which can be the lender who is foreclosing the property. In fact, any lender holding a lien position can bid up to the amount of the debt owed on the property.
The primary benefit of buying a foreclosed property at auction is there is always a possibility of picking up a great deal. Real estate investors assess the value of any given property (including the Loan-to-Value) by using the valuation method that best suits their investment model. Buying a foreclosure include these risks:
- No inspection prior to sale
- The payment of delinquent property taxes
Defects of Title
Buying a foreclosure, especially at a public auction, is NOT for the faint of heart. Amateurs should enter these buying opportunities with a qualified agent or legal counsel.
Purchasing a Short Sale
When the real estate market faltered around 2008, short sales became a go-to option as home prices fell dramatically, and quickly. This was a time when properties were being sold for a price that did not even cover the existing debt on the property. This type of distressed sale:
- Allows the buyer a chance to inspect the property ahead of closing
- Typically has a clear title
- Requires the seller to pay the delinquent taxes
This type of distressed sale purchase requires patience as the lender must give their consent to the transaction -a sale where they receive less money than they are owed.
Purchasing a Real Estate Owned Property (REO)
An REO gives distressed property buyers a chance to buy a foreclosed property directly from the lender. This typically happens when a lender offered the highest bid at an auction and they become the property’s owners. Purchasing an REO is less risky because a buyer:
- Can inspect the property
- The title risks are mitigated.
- The lender is responsible for unpaid taxes
An REO purchase often requires the buyer to pay for purchase upfront, in cash. A drawback regarding an REO purchase is that the property may need significant repairs which remains the responsibility of the buyer. It is noted that lenders who own these REO’s prefer to sell to buyers who have available cash for a quick closing.
Hard money lenders are a great source of financing for distressed properties. Seasoned, insightful investors often find profitable opportunities using hard money financing. But, be forewarned, amateurs should think twice before choosing to go it alone.
The investment in a new building requires careful planning and access to a high level of capital. Several funding options are available for this type of loan. Two common options include a bridge loan and a construction loan. Both have different purposes and benefits. Those considering these loans should think about the length of the project. Hard money lenders provide access to both options.
What Are Construction Loans From Private Lenders?
The goal of construction loans is to provide capital for the construction of a building. This includes small commercial, apartments, and single-family homes. Generally, these loans are designed to provide capital right away to fund the building process.
They do not remain on the property after the completion of the build. Typically, the property owner secures a home loan to cover this cost or another type of property loan.
These loans are available only after a construction timetable and a full detailed plan of the process is complete. There will always be the need to provide a detailed budget that outlines what the funds will be used for. It should include all aspects of the cost to construct the building. This includes all building materials, all appliances, all finishing, and all fixtures. It should also include labor costs.
There are a few things to know about this type of loan:
- They generally remain in place for a year or less.
- Some hard money construction loans can cover some of the lot purchase prices. Generally, the lot lien must be in hand prior to the construction loan’s funding.
- There is a down payment requirement in most cases. This loan to value amount depends on the individual circumstances of the loan as well as the lender’s preference.
- The fees and interest rates on these loans vary per project. However, they are typically competitive.
Keeping this in mind, other solutions are available. For example, for an owner-occupied loan on a new home, it may be possible to obtain new construction loans without any down payment. This is not always available, though some private lenders offer it.
What Are Bridge Loans from Private Lenders?
A bridge loan is a bit different but still offers the same qualifications and availability. The major difference here is that a bridge loan is very short term. They work to cover the gap that occurs between the time that the property buyer needs to make a purchase of the property and the time work on the property is complete.
For example, a bridge loan can help to provide more flexibility so that a tenant or a home buyer can be found. It allows for time for builders to make the required repairs and renovations necessary. This is short-term financing. There are a few things to keep in mind.
- Bridge loans are typically beneficial only for short periods of time under a few months.
- They are available as both commercial loans and residential loans.
- Most often, these loans have slightly higher interest rates than construction loans. However, they are rather easy to obtain for well-designed projects.
Hard money loans for these needs can be readily available often sooner than traditional loans. Additionally, other types of construction loans are available to meet specific goals. This includes residential rehab loans, fix and flip loans, distressed property loans, and cash-out refinances.
Generally, borrowers need to work closely with private loan lenders to ensure they have a clear plan forward in both options. Borrowers must be able to show them what the end goal is and how the home will be sold or how another loan will be obtained to repay these existing short-term options.
Even brokers who usually work with traditional lenders can benefit from a relationship with a good private lender. Banks and typical mortgage companies won’t touch some kinds of loans or some types of buyers. Unless the broker can find alternative financing for a tricky commercial property loan or even some home loans, they will lose the deal. Learn more about the ways that private lenders can offer more opportunities to help improve a brokerage business.
When Does a Commercial Loan Need Private Investment Money?
Some companies need to purchase property before they can generate the revenue that they need to qualify for a regular business loan. They have a chicken-or-the-egg problem. However, private investors can offer them a commercial property loan to help them solve it. This is because these private investors consider the value of the property as one of the main factors to qualify the loan.
Private lenders can usually gather the information they need to make decisions quickly. This way, the business can obtain funding, get to work, and then look into obtaining separate financing later to pay back this type of loan. Because private lenders typically offer short-term financing until companies can gain financing, these kinds of loans are often called bridge loans.
When to Seek Private Home Loans?
Homeowners might need to seek private lenders for a variety of reasons. One of the most common examples includes people who need to buy a new home before they can sell their old one. With a mortgage on the old home, these clients might not qualify for the new loan. This frequently happens when homeowners get abruptly transferred by their company or get a new job in a different city. The owners know they will need to make payments on two homes for awhile; however, they have decided it’s the best financial decision to wait until they can get offered a good price for their first house.
These homeowners have to find a home for their family to live in quickly, and they can’t afford to wait until they sell the first house. Again, private lenders will primarily consider the value of the property that they will lend money for. They may also consider the reason that the homeowners want to buy a second house before selling the first. Private lenders can also make decisions much faster than banks can, so the family can get settled in a new city quickly. Once the first home sells, the family should qualify for a traditional mortgage and be able to pay the private lender back promptly.
Private Investment Property Loans
Property investors may have to act quickly when they find a good deal on an investment property. They certainly can’t wait weeks or even months for a bank mortgage officer to make a decision. If investors want to purchase multiple properties, they may never be able to qualify for regular mortgages anyway because their debt ratios will be too high for a regular mortgage lender.
Private investors qualify borrowers differently. They can offer lending approvals and cash quickly, so the investor can take advantage of the deal before it gets snapped up by a competitor. Property investors often plan to rehabilitate and sell the home, which gives them the funds to pay the lender back and take a profit.
Why Develop a Relationship With Private Lenders?
Of course, all private real estate lending companies aren’t the same. Even though it’s realistic to expect higher interest rates from private loans, it’s only fair for brokers to find lenders who will offer their clients rates and fees that are competitive with other private lenders. Mostly, brokers know that their clients want quick loan approvals, rapid funding, and minimal paperwork.
If you are planning to build a new home or perform extensive rehabilitation work on an existing home, a construction loan can help you get the money you need to complete the project. However, construction loans are different from a standard mortgage. If you are interested in this type of loan, you need to work with a lender who has experience with construction loans and can help you find the solution that is best for your needs. We have the experience and resources necessary to help you move through the application process quickly and secure the funding you need.
What Is a Construction Loan?
A construction loan is a loan you can use to build a new home or possible make renovations to an existing home. In most cases, a construction loan is a short-term loan with a maximum term of approximately one year. Once your project is complete, you can apply for a traditional mortgage to replace the construction loan if necessary. Construction loans are also considered hard money loans in most cases, which means they are asset-based loans with higher interest rates than a traditional mortgage. Interest rates may also be variable over the loan’s term.
Because construction loans are so different from other types of home financing, finding an experienced lender is essential. A lender with an in-depth understanding of construction loans can simplify this process and help you get the money you need with as little difficulty as possible.
Will I Be Approved?
When applying for hard money loans like a construction loan, you must provide a variety of information about your financial situation. Some of the factors we will consider when deciding whether to approve your application include:
- The current value of your property.
- The estimated value of the home after it is complete.
- Your income.
- Your credit history.
- The income and credit history of any co-borrowers.
Our construction loans have specific requirements you must meet in order to qualify. The exact requirements will depend on the specific type of financing you request. We will discuss all of these details with you as you prepare your application. After we pre-approve you for construction financing, we may request additional documentation before finalizing the loan.
Keep in mind that a construction loan will not act as a long-term mortgage. Once your construction project is complete, you may need to secure a traditional mortgage loan.
How Much Money Can I Borrow With a Construction Loan?
Construction loans are designed to help you complete a project, whether it be a renovation or a new home. For this reason, the amount of your construction loan will be higher than the property’s current appraised value, leaving you with a loan-to-value ratio higher than 100 percent. The exact amount you can borrow depends on the specifics of your intended project and your financial situation. Contact us today to learn more.
How Quickly Can I Be Approved?
If you are ready to begin a construction project, you will want to get a loan as quickly as possible. Fortunately, our company has significant experience providing construction loans to borrowers, and we can help you move through the application and approval process quickly and efficiently. Every borrower is different, but we will do our best to get you the money you need fast so you can start working on your new home.
We are proud to offer construction loans for all types of projects. Please contact us today to learn more about construction loans or to begin the application process.