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Hi everybody. I am looking at a property (in MA) which is scheduled to go to foreclosure auction within the next couple of weeks. The first mortgage is foreclosing, and there are no other liens on the property. Although I have never purchased a home at an auction before, I have tried to glean as much information as I can regarding the foreclosure process in Massachusetts by reading everything I can get my hands on (that is relevant to this area) and interrogating local foreclosure attorneys. Depending on how high the bidding goes (and I already know how much I realistically can - and would be willing - to afford), the house could be a good deal for the area. The problem is, I do not have the cash to pay for it in its entirety. At best, I could pay cash for about 20-30% of my maximum bid value. The rest I would need to obtain financing for.
In general, I have been told not to even consider bidding on a property at an auction unless you have the cash funds to pay for it outright. I have seen a couple of posts in this forum advising other individuals in a similar situation to seek out a hard money lender. I don't see how a person like myself would be able to obtain a hard money loan - I don't own any other real estate or extremely valuable assets which I could use as collateral. Can you obtain a hard money loan without equity or some other form of collateral? If so, is such a loan challenging to come by? I have a stable job and very good credit.
Furthermore, I am afraid that if I bid on the property, I won't have access to the interior in order to get an appraisal required for a conventional mortgage (to my knowledge, the owners currently reside there). I have been told by a couple of lenders already that they will not do drive-by appraisals for a property that is being sold at a foreclosure auction (understandable). I am wondering if a drive-by appraisal would be considered for an auction property if the buyer were to put a more substantial sum (20-30%) down? Otherwise, it seems impossible to finance such a property via conventional means.
Does anybody have any advice for me? I would really like to pursue this property, assuming it does indeed go to auction, but I will not do so unless I can get the proper financing together. I am having a very difficult time finding information re: financing a foreclosure auction property without cash in toto, so I would be very interested in hearing other alternatives if they exist. Thank you for your help!
Is the property currently listed with a real estate agency? If so, they should be able to get you in to look. I know that some auction 'sites' have particular open house days a week or two before the auction.
If it's being auctioned through a 'company' as opposed to say, a lender on the courthouse steps, check with the company as to their requirements for financing. Some have stipulations that you must bring an approval letter and be able to close within a certain amount of time.
A lot of homes are sold 'as is' which means you really should get in to check it out before bidding - unless the price is so ridiculously low and you could afford to fix/replace any possible problem it might have.
I would say forget hard money.
It is not a good avenue to acquire property, IMO.
The terms are close to usurious, and commonly set up so the hard money folks can take the property after they break you.
What is the point of paying 4 or 5 points up front, putting down 30%, paying double digit interest, and having a 60 or 90 day balloon?
Your Realtor should be able to put you in touch with a local hard money lender. I would also go to a few auctions in advance to see the process in person.
You can refinance the property once owned and pay off the hard money loan as quickly as you can.
Thank you all for your replies. So it seems the situation is tricky, but not necessarily hopeless.
Peachstatehomegal - The property is not listed with a real estate agent. It is currently in pre-foreclosure, and the first mortgage lender is foreclosing at an auction in the next couple of weeks. The auction takes place on the property itself, but (at least in MA for these types of foreclosure auctions) bidders do not have access to the interior of the house. In this case, the owners are still living in it. The terms of the auction are: bring a $5000 deposit and close in 30 days or forfeit the deposit. This seems to be pretty typical for the area. Therefore, most investors around here pay in cash or with hard money loans. As you mentioned, it is a pretty risky process because we have no idea what the inside of these properties look like and have no opportunity to view the interior until closing. For this particular property, the starting bid is low enough to make the risk worthwhile, if only I can get the remainder of the financing.
MikeJaquish - This is a good point, and something I am definitely concerned about. Is it even possible to get a hard money loan without collateral? I don't currently own any real estate. I was under the impression that these types of loans are generated off of existing equity in another property, but perhaps I have an incomplete understanding of how they work.
2bindenver - I have been able to find several local hard money lenders in this area, but I am wondering if I am even eligible for a hard money loan. I do not own any real estate to use as collateral. Would I be able to obtain this type of loan without that equity? Furthermore, assuming I did acquire such a loan (playing devil's advocate here), what if the current owners refuse to move out and need to be evicted? I have heard horror stories of evictions taking 6 months - a year, and the hard money loan needs to be repaid in a few months, but if I still don't have access to the interior of the property for an appraisal, I won't be able to get a conventional mortgage. I am not sure what happens in this sort of scenario. I suppose you forfeit the property, lose your deposit, and mess up your credit, but that's just a guess.
Thank you all again for taking the time to read and answer my post. I will keep scrounging for more information.
Most hard money loans are secured by the property you are buying. My local guy loans 70% of after rehabbed value. Charges 4-5 points and Interest rates are in the 10% range. Loan is for a max of 9 months. Plus there are closing costs. $50K minimum.
Hi DNC, thank you for your post. I did not realize that you could use the property you are buying as collateral. Can you tell me how the after-rehab value is obtained? Do hard money lenders still require an interior appraisal to get an estimate of what its after-rehab value will be prior to granting the loan? My biggest concern is that I will not have access to the inside of the property until after closing since it is likely that the owners will not have left the home unless they are evicted.
You will have to pay for the appraisal before funding so the lender can see the value is there. You will have to find a way to get it done with tenants in the house, though you will be laying out the fees before you have even won the auction.
Im not sure I would want to do that as you might get outbid at the auction and will have paid for an appraisal for nothing.
You could get a proof of funds from the lender just to go the auction and plan on getting the appraisal done after auction, but if you win the auction and then the house does not meet appraisal you may have to come up with the extra cash to make the deal work.
I dont do auctions unless I can pay all cash or have the cash available to make the deal work if appraisal does not come back high enough.
Also keep in mind that if you are the winning bidder, you will be responsible for evicting the current occupants.
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