Consider this scenario: A house is in foreclosure. The bank is ready to get rid of the house. It’s a fixer-upper in a neighborhood that you know is ready to grow. You’re all ready to jump on it. It’s the dream opportunity you’ve been waiting for so you try to get financing. And that’s when your dream becomes an ugly reality.
Obtaining financing to purchase a foreclosure at an auction can be difficult. Banks often want to stay away and getting a loan is out of the question, most of the time. These factors can make it incredibly hard for people without liquid cash to purchase a foreclosure. Luckily, there are other ways to find the house of your dreams and obtain financing for it.
Why You May Need Foreclosure Auction Financing
When a homeowner can no longer pay their mortgage, one of two outcomes happens: (1) they quickly sell the home, or (2) the home goes into foreclosure and is owned by the bank.
Oftentimes, the bank wants to sell a foreclosure as soon as possible so it’s placed up for auction. There are three types of foreclosure auctions:
- Absolute auction (no minimum bid, highest bid gets the property)
- Minimum bid auction (there’s a minimum bid, which raises the floor quite a bit)
- Reserve auction (the seller reserves the right to accept or reject the highest bid)
The benefit of a foreclosure auction is that there are often a lot of houses for sale and the bank is a seller that, for the most part, is eager to get the properties off their books. But the downside is that there are usually tons of other bidders who can drive up the price. What may have once seemed like a low-cost investment, is now one that may require additional financing should you decide to bid and win.
Winning the Bid
Most foreclosure auctions require payment in cash (or a cashier’s check) within a relatively short time after winning a bid. The rules depend on the jurisdiction, but you might have to pay a portion of the sale price upon winning the bid.
If you have the cash on hand to put down the required percentage of the sale price, you’re one step closer. But a problem can arise when you have to pay the rest within a few weeks. If you don’t pay by a certain time, you may be subject to fines, and you could even lose the bid.
When dealing with foreclosure auctions, you need cash fast. Unfortunately, most banks don’t want to approve mortgages or loans for foreclosures, as they’re seen as risky. And, even if they do consider offering your financing, it could take weeks to hear back, causing you to miss the deadline.
To avoid losing a foreclosure after they’ve won the bid at an auction, many real estate investors turn to creative ways to get financing.
Different Ways To Get Foreclosure Auction Financing
It may be hard to get traditional financing, but that doesn’t mean it’s impossible. Here are some of the ways I’ve seen other real estate investors get foreclosure auction financing:
Paying Cash, Trying for a Loan
This is a classic way that people try to circumvent the issue. They scrape up the cash and then try to get a loan without really disclosing that it is for a foreclosure. That doesn’t usually work, since banks generally want to know what you are getting a loan for. There are also pretty high interest rates. This probably isn’t the best option.
Applying for a Renovation Loan
A renovation loan is specifically designed for homes that need repair. If you plan to renovate the home before you sell it, you might be able to cover the cost of the house with a renovation loan. Depending on the program, the interest rate can be fairly low. But you’ll need a decent credit score to gain approval and it isn’t guaranteed to be a quick process.
Using an FHA Loan
FHA loans are typically for those with not-so-great credit. They are also for those who want to live in the house they are buying. There are usually pretty good rates for people with lower credit, but, again, it is not for fix-and-flippers. There are a couple of ways around this, such as holding on to the house for the minimum time period (and hoping the market goes up) or just selling it and taking the penalty. It can be pretty risky either way.
Borrow From a Private Lender
It’s convenient to be able to borrow money from family and friends but you’ll likely be on the hook to pay them back, even if the investment doesn’t pay off. That can be stressful. It can also place a strain on relationships.
A HELOC loan is a line of credit you can take out on a property you already own. You can use this loan to do pretty much anything you want, and you don’t have to pay it back for a while. But when you do, you have to pay back a lot. Using a HELOC to buy another property means that you’ll want to make sure you receive a decent return, otherwise you can really put yourself in a hole.
Using any one of these methods can present advantages and disadvantages but if you’re looking for a better way to buy foreclosure, consider doing so with the help of a network of real estate investing professionals.
A Better Way To Buy Foreclosed Property
The great thing about foreclosures is that the bank wants to sell. But to avoid foreclosure, the homeowner will likely want to sell. Your best option may be to reach out to them about purchasing the house to avoid issues with financing later on down the line. A good way to make sure you’re top-of-mind when a distressed homeowner is ready to sell is by partnering with a well-known network of buyers.
When I became an independently owned and operated HomeVestors® franchise owner, I gained access to the leads that come in through its nationally-known We Buy Ugly Houses® marketing campaign. Distressed homeowners call HomeVestors and I can get the lead. I don’t have to worry about bidding among the competition and trying to get financing after winning a house in a foreclosure auction.
What’s even better is that HomeVestors® has a unique, proprietary hard money portal as one of their real estate tech tools for franchisees. I plug in the details of the deal, hard money lenders offer me rates, and I’m able to choose the one that works best for me.
In the end, the homeowner can avoid foreclosure and get the cash they need and I get the home I want.
Are you ready to join a nationwide network of experienced real estate investors and get financing options for distressed homes? Contact us today to find out how to become a HomeVestors® franchisee.
Each franchise office is independently owned and operated.