A distressed property is a property that’s being sold by the lender or is in foreclosure. There are a few different reasons a property may be in this situation, but regardless of the cause, a distressed property offers a great opportunity for investors to get a great purchase price and significant profit. If you’re considering purchasing a distressed property but don’t have the cash to do that right now, there are a few reasons you should consider hard money lending to get the money you need. Here’s what you need to know.
Benefits of Purchasing Distressed Property
Before you obtain a loan, it’s important to recognize the overall benefits of purchasing a distressed property. When a lender repossesses a property, they want to get rid of it quickly and recoup their investment. That means that the price is usually far lower than you might otherwise be able to afford in a certain location. Another benefit is that you’ll usually be able to make a good profit on a distressed property by adding some repairs and updates to make the property more attractive to other buyers. The sale can potentially go through quickly, and if you’re able to upgrade the property quickly, you can repay your hard money loan quickly as well. Here are some reasons to consider a hard money loan for financing the purchase of a distressed property.
One of the best things about these loans is that they’re faster than other types of loans. Your credit score isn’t weighed very heavily; instead, the property is used as collateral. You can have the loan underwritten in a week or two rather than a few months.
More Attractive Buyer
This type of loan gives you cash to offer to the seller, which can be extremely helpful if the property is a hot commodity with many offers. Cash gives you some leverage in negotiations, and your whole loan process can be done very quickly. This can give you a leg up in investment opportunities in up-and-coming neighborhoods that other investors are starting to catch onto.
Different Loan-to-Value Ratios
Another benefit of hard money loans is that the way these lenders determine loan-to-value (LTV) ratios differs from that of conventional loans. That means you can potentially receive more funds than you would from another lender, even though the LTV ratio may look lower at face value. Conventional lenders have to abide by federal regulations by calculating loan amounts from the purchase price or appraised value. However, hard money lenders have more freedom to choose the value they want to use for the LTV because they’re not bound by those federal regulations. That means that private lenders use a higher property value, and, in some cases, they’ll even consider the value of the property after upgrades are made instead of the as-is value. The result of this different LTV calculation is often the funds to not only purchase the property outright, but to pay for rehabilitation costs or loan payments as well until the property is sold again.
Loan Structuring Possibilities
Another benefit of hard money loans is how they’re structured. Many lenders are willing to loan additional funds that exceed the property’s purchase price into the overall loan for loan payments or renovation costs. More creative restructuring may require the borrower to compile estimates of rehabilitation costs and to disclose potential issues so that the lender is able to structure the loan to take these factors into account.
To talk to a lender about money for a distressed property, contact Investor Loan Source today.