Finding and Buying Distressed Properties: What Hard Money Borrowers Need to Know
If you’re looking to buy a distressed property or fixer-upper, it’s not uncommon to seek out a hard money loan or “bridge loan” - especially for highly-competitive real estate markets, when you don’t have the time or the luxury of waiting for the bank before you pounce on a good deal.
But not all distressed property deals are good deals. How do you know what to look for and what to avoid? Let’s take a closer look:
The successful bidder could very well obtain a below-market price for the property, however buying up foreclosed properties is not for the beginning bargain hunter. Even with the prospect of a below-market price, there is the possibility that the title has legal issues associated with it. You may be responsible for paying any property taxes or other fees that are still due.
Oftentimes, bidders are also unable to inspect the property beforehand, so there may be other issues that come to light after winning the bid. If you are new to the world of foreclosure auctions, we highly recommend seeking out trusted legal counsel before you jump in.
So what’s the risk? The lender has to agree to the discounted payoff in order to release the existing mortgage. Even when a property is listed with specific short sale terms, that doesn’t necessarily mean that the lender will accept your offer, even if the seller does.
And although one of the big attractions of short sales is that they can close in 30 days or less, very few actually do. If you’re willing to wait anywhere from 3 months to a year, your patience could pay off.
As you might expect, this presents a great deal for prospective buyers. Like with short sales, you have the opportunity to inspect the property and there’s likely no issue with the title transfer. Taxes, fees and liens are also the seller’s responsibility, so REOs can be a good deal all around.
So what’s the issue? Because these types of properties are in high demand, there’s a lot of competition for them. Even though banks aren’t in the real estate business, they know a good deal when they see one, so they may require the whole price to be paid up front in cash. This gets the property off their hands and money in their pockets.
Not surprisingly, bank loans can take far too long to get qualified and approved for before the REO property is snapped up, which is why private money loans for REOs are becoming increasingly popular. You get the money you need quickly, and may be able to score a lucrative property in the meantime.
Keep in mind that with a note purchase, you’ve bought the lien right from the lender. This isn’t the same thing as the right to own the property. For this reason, you cannot have it inspected. Be aware also that the note itself is only as valuable as the borrower’s ability to repay, so if they default, you’ll have to go through the often lengthy and expensive foreclosure process in order to actually obtain the property.
So what are the advantages of a note purchase? It’s possible to reduce the borrower’s monthly payments because of the low price paid for the note, thereby creating some extra profit for yourself. There’s also the possibility of convincing the borrower to sign over the deed rather than face foreclosure if they are unable to repay the loan. Here again, competent legal counsel is strongly recommended.
But not all distressed property deals are good deals. How do you know what to look for and what to avoid? Let’s take a closer look:
Foreclosure Auctions
A foreclosure auction is one in which properties are auctioned off to the public and are sold to the highest bidder. It’s common for lenders to bid on the full amount off their loan in order to recoup their losses, but the big attraction of foreclosure auctions is, of course, the excitement of winning.The successful bidder could very well obtain a below-market price for the property, however buying up foreclosed properties is not for the beginning bargain hunter. Even with the prospect of a below-market price, there is the possibility that the title has legal issues associated with it. You may be responsible for paying any property taxes or other fees that are still due.
Oftentimes, bidders are also unable to inspect the property beforehand, so there may be other issues that come to light after winning the bid. If you are new to the world of foreclosure auctions, we highly recommend seeking out trusted legal counsel before you jump in.
Short Sales
A short sale happens when a property is sold for less than what is owed to the person or company who still holds a lien on it. Unlike foreclosure auctions, short sales allow you to inspect the property before you buy, and chances are also good that the title is clear of any liens. The property taxes and outstanding fees are also the seller’s responsibility.So what’s the risk? The lender has to agree to the discounted payoff in order to release the existing mortgage. Even when a property is listed with specific short sale terms, that doesn’t necessarily mean that the lender will accept your offer, even if the seller does.
And although one of the big attractions of short sales is that they can close in 30 days or less, very few actually do. If you’re willing to wait anywhere from 3 months to a year, your patience could pay off.
REOs (Real Estate Owned Properties)
When a lender, for example a bank, has the highest bid at a sale, a property becomes an REO or real estate owned property. Since banks are not in the business of owning real estate, they are often looking to get rid of these properties for less than what is owed on them.As you might expect, this presents a great deal for prospective buyers. Like with short sales, you have the opportunity to inspect the property and there’s likely no issue with the title transfer. Taxes, fees and liens are also the seller’s responsibility, so REOs can be a good deal all around.
So what’s the issue? Because these types of properties are in high demand, there’s a lot of competition for them. Even though banks aren’t in the real estate business, they know a good deal when they see one, so they may require the whole price to be paid up front in cash. This gets the property off their hands and money in their pockets.
Not surprisingly, bank loans can take far too long to get qualified and approved for before the REO property is snapped up, which is why private money loans for REOs are becoming increasingly popular. You get the money you need quickly, and may be able to score a lucrative property in the meantime.
Note Purchases
As the name itself implies, note purchases mean that the buyer actually purchases the lender’s promissory note instead of the property itself. Note purchases come with many risks not found when purchasing other types of distressed property.Keep in mind that with a note purchase, you’ve bought the lien right from the lender. This isn’t the same thing as the right to own the property. For this reason, you cannot have it inspected. Be aware also that the note itself is only as valuable as the borrower’s ability to repay, so if they default, you’ll have to go through the often lengthy and expensive foreclosure process in order to actually obtain the property.
So what are the advantages of a note purchase? It’s possible to reduce the borrower’s monthly payments because of the low price paid for the note, thereby creating some extra profit for yourself. There’s also the possibility of convincing the borrower to sign over the deed rather than face foreclosure if they are unable to repay the loan. Here again, competent legal counsel is strongly recommended.
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