Short Sale Financing

Short Sale Financing

Once both parties have agreed to your proposal, you have submitted all of the necessary information to the lender, and the lender, having examined all of these documents, has approved the Short Sale—then it is time for you to produce the agreed-upon funds.  If you have this much money readily available and are prepared to invest it in your Short Sale, then this is a simple matter of paying the lender from your personal account.  However, most Short Sellers, especially those who are first starting out, will not have this much capital available.  If this is the case, then now is the time to acquire Short Sale Financing.

Effectively, there are two sources you can pursue to acquire Financing: Hard Money Lenders and Private Investors.  Both of these have advantages and disadvantages depending on the circumstances involved.  Generally speaking, most Short Sellers will rely primarily on Hard Money Lenders when beginning their Short Sale careers, so that’s the option we’ll focus on initially.

Before we get ahead of ourselves, let’s define just what exactly Hard Money Lending means.  Hard Money Lending is the practice of companies’ investors lending money to speculators and other investors for short term, high interest rates.  Unfortunately, this interest rate usually is quite high: somewhere between 12% and 20% is standard.  Since that is such a significant percentage to pay as interest, the question is: Why should a Short Seller utilize Hard Money Lending?

The answer is that the services offered by Hard Money Lenders more than make up for this high interest rate.  Specifically, Hard Money Lenders are invaluable for Short Sellers because they provide a large portion of the necessary funds and, more importantly, they make this money available quickly.  This is hugely important when it comes to Short Sales because, after the deal has been approved by the lender, you will have a very short period of time to produce the necessary funds.  Traditional lenders often take a very long time to approve any sort of sizeable loan; Hard Money Lenders, however, are fast, and can get you the money you need by the time you need it.

Most Hard Money Lenders will be willing to provide up to 65% of the After Repair Value (ARV) of the home.  So say, for example, that you have a Short Sale in which the purchase price of the home is $45,000, you believe that $15,000 worth of renovations are required, and the ARV is estimated at $100,000.  In this case, a Hard Money Lender will lend you up to $65,000, which will be sufficient to cover both the purchase price and repairs, and so you will not need an additional investor.  However, if the values were $80,000 for purchase, $10,000 for renovations, and $110,000 ARV, a Hard Money Lender would typically lend only up to $71,500, meaning you would need to bring in an additional investor.

The high interest rate charged by Hard Money Lenders is partially offset by the fact that you will not pay for a whole year’s interest.  Usually, hard money lenders will require a minimum of three months’ worth of interest payments.  Assuming you sell the house in that time frame or sooner, you will only pay a small portion of the annual interest.  For example, if you acquired a $60,000 Hard Money Loan at 18% interest and sold the house in two months, your interest payments would come out as:

$60,000 (Principal)

X 0.18 (18%)

$10,800 Annual Interest

$10,800

÷ 12 (12 Months)

$900 per Month

$900

X 3 (3 Months Minimum Interest Payments)

= $2,700 Total Interest Due

$2,700 would be the total interest payment on your loan.  A large amount, yes, but a relatively minor cost when compared to the profit you gain from the Short Sale.

However, sometimes you will pursue a Short Sale with the intention of holding onto the property for an extended period of time in order to make bigger, more drastic renovations to greatly increase the value of the property.  If this is the case, then Hard Money Lenders are probably not your best option, as that interest rate becomes a significant issue as time goes on.  In these situations, your best option is to utilize Private Investors.  Private Investors charge a lower interest rate than Hard Money Lenders—usually 7% to 12%, a decrease which becomes more and more substantial the longer it takes for you to renovate and then sell the home.

There are a few drawbacks to working with Private Investors.  Whereas Hard Money Lenders are the representatives of corporations or financial groups, Private Investors are individuals who are investing their own money.  Consequently, and most significantly, Private Investors will therefore oftentimes require greater convincing before they provide you with funding, which can be problematic if you are facing a tight deadline.

But Private Investors also offer benefits beyond the lower interest rate.  Most notably, over time you will be able to build a strong, personal relationship with a Private Investor, and you will therefore develop a level of trust which is simply impossible to create with a Hard Money Lender.  When both the Short Seller and the Private Investor trust one another, everything moves much more smoothly.  Neither side will have to screen the background of the other and the Private Investor will not feel inclined to constantly check in on the Short Seller’s progress.  As a result, the Short Sale process as a whole will move along much quicker.  Trust is a great asset in any business relationship, and it can be incredibly valuable to a Short Seller.

I discuss Hard Money Lenders and Private Investors, as well as other Short Sale Financing options, in much greater detail in my Short Sales Magic Home-Study Course.  This is a comprehensive program which you can consult in your own time, designed to teach you everything you need to know about Short Sales.  And if you would like even more in-depth, personalized instruction, I encourage you to consider attending my Short Sales Boot Camp.  Whether you’re an experienced Real Estate expert or a beginning Investor, both my Home-Study Course and Boot Camp are great options for anyone interested in Short Sales.  For more information, please visit www.shortsalesmagic.com.

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