Using Hard Money Loans to Purchase Properties at Auction

Purchasing real estate at auction can be an exciting and lucrative way to grow your investment portfolio. But coming up with the cash to close quickly after winning a bid can be a major challenge. This is where hard money loans can make all the difference.

Hard money loans provide fast, flexible financing that is perfectly suited for auction purchases. With quick access to capital and streamlined underwriting focused on the property rather than your credit, these loans empower you to compete aggressively at auction and secure properties at the right price.

In this comprehensive guide we’ll delve into all the ins and outs of leveraging hard money loans to purchase auction properties successfully.

Why Hard Money Loans Are Ideal for Auctions

Traditional mortgages simply don’t work for auction buyers who need to close immediately or within days of winning a bid. Lengthy approval processes and strict credit requirements make it difficult, if not impossible, to obtain financing in time using conventional loans.

Hard money loans fill this gap by offering rapid funding, Here are some of the key advantages that make these loans ideal for auction buyers

• Speed: Hard money lenders can approve loans and fund them within days or even 24 hours in some cases. This rapid turnaround enables auction buyers to meet tight closing deadlines.

• Flexibility: Hard money loans are asset-based, meaning the lender focuses more on the property’s value rather than the borrower’s creditworthiness. This allows even those with less-than-perfect credit to qualify.

• Higher LTVs: Hard money lenders are often willing to lend at loan-to-value (LTV) ratios of 60-80%. This allows the buyer to leverage more financing.

• Non-traditional Properties: Hard money lenders will finance properties that don’t meet conventional lending standards, like fixer-uppers purchased at auction.

• Fewer Restrictions: Hard money loans have fewer limits on how you can use the funds compared to traditional mortgages. This offers more flexibility.

With the ability to access financing at a moment’s notice, hard money loans empower auction buyers to think on their feet, bid confidently, and move swiftly to secure properties.

How Much Hard Money Financing Will You Need?

As an auction buyer using hard money loans, it’s essential to determine precisely how much financing you’ll need even before starting your search. This helps you bid judiciously within your budget.

Here are some factors to take into account:

• Purchase price: Your maximum bid price will form the basis for determining the loan amount needed. Research property values in the area to establish a sensible bid limit.

• Down payment: Hard money lenders typically require a 20-30% down payment. Factor this into your calculations.

• Closing costs: In addition to the purchase price, budget 2-5% of the total for various auction house and title transfer fees.

• Rehab costs: For fixer-upper properties, build in realistic estimates for repairs and renovations. Get contractor quotes.

• Interest payments: Consider the monthly interest payments on the loan principal based on the lender’s rates.

• Holding costs: Budget for taxes, insurance, utilities, and other costs you may incur while owning the property.

Crunching the numbers in advance gives you a clear sense of your financing needs and bidding capacity, ensuring you don’t overextend yourself.

Getting Pre-Approved for a Hard Money Loan

To bid with confidence, you’ll want to have a hard money loan pre-approval in hand before even stepping foot in the auction. Here are some tips for securing pre-approval fast:

• Compare lenders: Look at factors like funding speed, rates, fees, loan terms, and LTV ratios. Aim for the best terms for your needs.

• Get organized: Have all required documents handy, including a purchase agreement, property inspection report, comparables, and estimates for repairs. This expedites underwriting.

• Ask about proof of funds: Many auction houses require bidders to provide proof they can pay within 24-48 hours. Ask the lender for a proof of funds letter stating your pre-approval amount.

• Be ready to move: Review auction terms and have your down payment funds immediately accessible so you can wire the deposit and close swiftly once you win the bid.

With financing pre-arranged, you’ll have the confidence to stay within your budget and bid aggressively on auction day.

Bidding Strategies with Hard Money Backing

Here are some bidding tips to make the most of your hard money loan when purchasing auction properties:

• Set limits: Stick to your maximum bid determined during pre-approval. Bid competitively but avoid getting caught up in bidding wars that can lead to overpaying.

• Come prepared: Bring a comprehensive property analysis including expected rehab costs and realistic after-repair value (ARV). This keeps your bids aligned with your projected profit goals.

• Bid decisively: The assurance of financing eliminates hesitations. You can incrementally increase bids knowing you have the ability to close the deal.

• Use proxies: If allowed, use a proxy bidder so you can discretely place blanket bids without tipping off competitors to your bidding ceiling.

• Exude confidence: Carrying yourself as though financing is already secured can influence the auction house to favor you over less prepared bidders.

• Have a plan B: If outbid, be ready to pivot to the next property aligning with your criteria. With financing ready, you can move seamlessly from one opportunity to the next.

With the power of a hard money pre-approval behind you, you hold a distinct advantage over other bidders still scrambling to arrange financing.

After You Win: Next Steps with Your Hard Money Loan

The fast pace of auctions means you’ll need to act quickly and efficiently post-sale to finalize the transaction. Here’s what to expect after you win the bid:

1. Secure the Property

• Sign a purchase agreement: Formalize the deal in writing and submit your deposit, usually 10% of the purchase price, immediately after the auction.

• Finalize loan approval: Notify your lender to remove any financing contingencies and lock in approval with the final bid price.

• Order appraisal: The lender will formally appraise the property to ensure the loan-to-value ratio supports the loan amount.

• Get ready to close: Work closely with the lender and auction house to prep all closing documents and have funds wired.

2. Close Within the Deadline

• Arrange inspections: If possible, complete inspections to identify any issues that may impact the property value before closing.

• Transfer title: The seller will sign over the deed, usually within 24-48 hours post-auction. Record the title under your name.

• Pay balance: Wire the remaining purchase price balance to the auction house. Your lender will provide the loan disbursement.

Within days of winning the auction, you’ll officially take ownership of your new investment property!

Managing Your Hard Money Loan Post-Purchase

The purchase is complete, but strategic management of your hard money loan remains vital. Focus on these key steps:

Repay the Loan on Time

Hard money loans generally have relatively short terms of 6-18 months. Be sure to refinance or sell the property within this timeline to repay your loan and avoid extensions or default.

Refinance for Long-Term Financing

Once you fix up and season the property, refinancing into conventional financing can help lock in lower fixed rates for the long haul.

Book Repairs Efficiently

If renovating the property, schedule contractors in a sequenced manner so repairs that impact appraised value are completed first. This allows you to refinance at maximum value.

List for Sale At Optimal Price

If flipping the property, consult real estate agents to list at the optimal price that balances maximizing profit with selling quickly to repay your loan on time.

With smart management, your hard money loan will serve as the launching pad to acquire and improve auction properties for a profitable flip or long-term hold.

Using Hard Money Loans for Bank-Owned & Foreclosure Auctions

In addition to traditional real estate auctions, hard money loans offer distinct advantages for purchasers bidding on bank-owned or foreclosed properties being auctioned.

These kinds of distressed property sales often have extremely compressed closing timelines. Hard money’s lightning-fast underwriting and funding makes it one of the only feasible financing options when bidding at foreclosure auctions.

Here are some tips specifically for leveraging hard money when buying foreclosed properties at auction:

• Research whether liens or back taxes apply and factor these into your financing needs.

• Conduct due diligence to uncover any title issues or defects that may impact closing.

• Be prepared to take over maintenance and repairs immediately post-closing.

• Budget for higher rehabilitation costs as distressed properties often require more work.

• Plan for higher carrying costs factored over longer timelines due to more extensive repairs needed.

While bank-owned and foreclosure auction purchases pose greater