Foreclosure Auction Financing Explained

So a critical aspect of buying a foreclosure auction is actually getting the funding. Cause once again, these are ones where you're not going to be able to actually close over the typical bank because they have often closed in 30 or 60 days and you most times don't have access to the property. So today I'm going to talk about it because a subscriber asked for a little bit more detail on the, actually the financing of a foreclosure auction. So let's get to it. If you have any questions, leave a comment below. And as always guys, we are Two Guys Stake on Real Estate. This is our auction masters channel. We appreciate you here. If this is at all helpful, make sure you hit that thumb up, thumb up icon because it tells everyone that this is great content. So thank you so much. And let's get right to it. Start off first. You know, when you're going to foreclosure auction, you need to understand the foreclosure process. Every state's a little different. I'm going to talk about specifically Massachusetts and Connecticut where that's where we go. It's going to be very similar to other States, but not always the same. One of them, for instance, might be the deposit amount. So for instance, Connecticut typically is 10% of the appraisal. That's the judicial state. They'll often actually hire and get an appraisal, which you can find on their court website. You know, just pull the docket number, you can run it, and then you can kind of pull a lot of information about that property and the foreclosure, which is invaluable to be honest. And then Massachusetts is generally five, 10, 15, 20, 25, generally a multiple of $5,000, often mostly five or $10,000 are your deposit checks. So some States I've heard that you actually have to come up with the deposit of the full amount that you're going to bid. That would be a whole nother process. And either you'd have to use a line of credit that you have, or, you know, maybe you have funds with a partnership or maybe a hard money lender that gives you, you know, the funds ahead of time. I'm not sure. Maybe even just going to the foreclosure auction yourself and actually experiencing it and asking a bunch of questions would be a great way to get familiarized with how it's done in that state or that County. I'm going to be talking about specifically Massachusetts and Connecticut because that's what we do. Just checking on the project. We typically use, you know, and keep on ourselves deposit checks that we fund by our cash on hand and our lines of credit. Now in Massachusetts and Connecticut, typically after you sign the memorandum of sale, winning an auction, you have to close in 30 days. We're not able to get typical financing. So what we have done in the past many times is use what's called a hard or private money. And so I want to talk a little bit more about that specifically so that you understand, you know, how to go about it. Now, these people, you can generally find, you know, talk to other realtors. I would talk to a mortgage brokers often have access to a lot of these private lenders. And you can also just go on, check out Facebook marketplace. I'll have them troll. They're looking for people looking to lend money because or to borrow money because they're looking to lend it and they're all going to have different terms. So typically you're going to find that these people are lending and 12 months increments. Maybe do six months, maybe the 12th, maybe they'll even do 18. But the average that I'd say is 12 months. So that means you have 12 months to have your exit strategy. Then you're going to have an interest rate. So they'll have, you know, maybe 10 or 12 or whatever it might be a percent. So that's basically if you borrowed a hundred thousand dollars and you've kept it for the whole term of the loans or the full 12 months, let's just say you'd be paying $12,000 in interest to them. On top of that, they might have an origination fee. It could be 1500 to $3,000 I've seen. And these are basically to cover maybe a drive by appraisal, some lawyer fees, whatever other processing fees that they drum up. And that is all kind of included there. And then they might also charge on top of that points. So what is the point? A point? So say if they charge one point, that is basically 1% of the loan. So back to the a hundred thousand dollar example, one point would be a thousand dollars, two points, $2,000 so on. And now sometimes, you know, and everyone's negotiable, they might have you pay those points and the origination fee at closing, and then they'll charge you monthly for the interest, or they might roll everything into at the end of the loan. It really depends. And honestly, often that's very negotiable. So some might be more amenable if you have a lot of experience, maybe you also can negotiate something with giving extra collateral, be careful of that. And if you're adding extra collateral, that might be having another property that you owe very little on or have own out, right. And you're putting it as a, they're putting a lien on it. Basically, if there's any if they aren't able to, if they have to foreclose on the other project and then, you know, there's a, it's under basically we're able to recoup all their money. They can then go after your other asset. Be careful that that's not something I'd recommend. It's very, I mean, it can be a great way to get stuff, but you just need to make sure you know what you're doing and that you're willing to risk that. Now you might also be able to include, include in that rehab or maybe a percentage of rehab. Maybe they'll also have you pay a deposit on the total thing. So these are all things and negotiable aspects of the loan with these lenders, private lenders, you know, typically are going to be people that, you know, have extra cash in there. Maybe, you know, they're a self-directed IRA, or they'll have it, you know, a line of credit that they're willing to leverage and they, you know, just an individual that looking to make a spread on, you know, as opposed to putting it into a CD or something. Hard money lenders are generally more institutional, larger company, players that basically are, maybe they have a line of credit with the bank and they're just, you know, lending out a spread. And they kind of, you know, generally have a larger pool of buyers and larger access to capital that they're looking to leverage. So private lenders might be a cheaper option than hard money lender for you. So just kind of keep that in mind. But shop around, figure out what people have and what you, you know, can get the best rates. So big thing in here is shop around for the best terms and the best rate that you, that will fit your person, you know, your project, whatever you're doing, buying a foreclosure option. And then they're often going to need at least two weeks to close. Some will close sooner. Some will close a little bit longer. Depends on how much they're doing for the, you know, if they're spending a lot of time on the title search or anything else and their lawyer, how long they take. But you really want to know what that timeline is because once again, you're putting a deposit down on this foreclosure auction. And if you don't close, you could possibly forfeit that deposit. So you really want to make sure that whoever you're going to be borrowing from will be able to close in a timely fashion. Otherwise you're risking five or 10, or who knows, you're down in Connecticut, 80 grand plus. It really depends on what you're doing. So you really want to make sure you have that lined up in advance. But this is like a method that we've used a lot in the past and still use somewhat today. But, and we also do some hard money lending ourselves to people that we know is a great way to, you know, do these foreclosure auctions and allows you to close on them and get the deals that we can get. Like the one we got just the other day was a two family house. It was a fantastic deal. And I mean, we were buying it in prices that honestly were like maybe four years ago. So that was really a great win for us. And we're all excited about that next project coming up soon in 30 days ish. And we will actually be leveraging private money for that one. And for those that is going to be a nine and one. So we have 9% with one point. If you have any questions about anything like that, or the person who requested this video I hope this answered all the questions that you were wanting to know about financing a foreclosure auction. Now, once again, you could possibly try, you know, using a traditional mortgage, but I tell you it's highly risky and then you're risking your deposit. If you don't close on time, I would err on the side of caution and use more something like a private funding. If that's what you need funding for or if that's what you need to do as opposed to your own money. Thank you so much for joining us and I wish you guys the best and I hope you guys win your first foreclosure or your second or third, whatever one you're on. And I wish you all the best and I'll see you guys on the next video.