As any experienced fix and flipper will tell you, foreclosure properties can often be picked up at a low price and flipped for a high profit.
The end of 2020 saw a lower number of foreclosure properties on the market due to a number of states implementing foreclosure moratoria – due to coronavirus. This has continued into 2021 with some states extending their moratoria.
However, several states are bracing themselves for a boom in the number of foreclosure properties available when these protections finish. Therefore, if you’re looking to buy a foreclosure at auction, it’s best to get prepared and get financing secured as soon as possible.
Hard money loans are a great option for both beginner and experienced fix and flippers in need of financing after buying property at auction. However, the hard money foreclosure process has a number of steps. It’s for this reason, I wanted to put together this guide on how to use hard money to buy foreclosures at auction.
Where can you expect to see an increase in completed foreclosure auctions in the first half of 2021? Check up this heat map from Auction.com.
When to Use Hard Money to Buy a Foreclosure at Auction
Before we get into the hard money foreclosure process, we want to underline the different scenarios where it’s worth using hard money to purchase a property at an auction.
It really depends on your exit strategy. Hard money financing is most commonly leveraged for fix and flips and BRRRR projects. So, if this is your exit strategy, a hard money loan could be a good fit for you!
However, if your exit strategy is to hold onto the property, and eventually live there, hard money might not be the best option for you. This is because they aren’t suited or designed for owner-occupiers. That being said, if you need quick access to capital, a bridge loan might be a good alternative. This will enable you to get the funds you need fast and give you sufficient time to source a conventional mortgage.
Hard Money for Auctions: Step-By-Step
If you’ve got an exit strategy well-suited for hard money, it’s time to look at the step-by-step process of buying a foreclosure at auction using hard money. Let’s get into it:
1. Get Pre Approval From Your Hard Money Lender
Before you even consider bidding on a property at auction, you need to get preapproval from a hard money lender. Thankfully, this process is relatively straightforward and with minimal fuss.
For example, here at We Lend, we can get your loan application approved and have the funds over to you in 3-7 days. Once you’ve got pre-approval, you’re ready to bid.
If you’re looking to get quick funds to buy a foreclosure at auction, fill out an application here.
2. Make a Down Payment
Once you’ve won the bid, you need to put down 10% of the purchase price of the property as soon as possible.
This can be made out as a certified check to the referee of the sale or you can use cash or wire transfer. However, if you are paying in cash, you need to make sure it’s accepted.
3. Open a New LLC and Sort Out the Contract
Before you receive your contract, you need to open a new LLC and ensure that the contract is made out to the LLC – not your own personal name. While there are some cases in which people receive contracts in their personal names, a hard money lender requires you to close an LLC.
There are several reasons why setting up an LLC is a better option for a real estate investor as opposed to using their own name. These include:
- Limits personal liability
- Less paperwork
- It’s not on your personal credit
The alternative to setting up an LLC is an S Corp. However, we’d recommend an LLC. An LLC typically costs $240 while an S Corp costs around $1,500. Moreover, it covers all the bases you need so don’t over complicate things.
Once the lender has reviewed your contract, they’ll submit the deal to the court. Courts will typically give you 30 days to close so don’t dawdle.
4. Appraisal and Title (And Then You Get To Work!)
Once the deal is submitted, your hard money lender orders an appraisal and a title search. Once the appraisal is ordered, it’s time for you to get to work.
Get a contractor in and fill out a scope of work. This will help the appraisal company know exactly what kind of work you’re planning. After that, they’ll be able to generate an accurate ARV for the foreclosure property.
Once the appraisal comes back with an ARV that is sufficient to get the deal done and the title comes back clear, we connect attorneys, run the final numbers and schedule a closing date.
5. Start Taking Out Renovation Draws
Now that the closing is done, it’s time to start the renovation process. The construction funds for your renovation comes in draws.
Cash is never given upfront for renovations. Therefore, you must complete a renovation draw to be reimbursed with your hard money funds. For example, if you borrow $50,000 for renovations, you must put forward the first $10-$20K to get the project rolling.
6. Now it’s Fixed, It’s Time to Flip!
Once the construction is done and the property goes on the market, all construction funds will be released back to you.
After you’ve found a buyer, the buyer’s mortgage bank will satisfy the lender’s loan and you walk away with a big profit.
Now You Know, What Are You Waiting For?
As you can see, using hard money to buy a foreclosed home at auction is not as difficult as you think. Moreover, now you know, it’s a good idea to start looking now.
2021 looks like a big opportunity for real estate investors looking to invest in foreclosed properties at auction, so make sure you’re not missing out on a potential cash cow. If you’re looking for more advice on how to buy a property at auction using hard money, speak to one of our advisors today.