The purpose of this post is to explain how to avoid a property tax sale for those who find themselves getting behind on their property taxes. There is no doubt that it can be a scary situation but there are solutions.
In California, a property can be sold at auction after property taxes have remained unpaid for 5 years. Depending on whether you are looking to save a property from a tax sale or buy one at a tax sale, this could be good or bad.
For those who have fallen behind on property taxes, it is important to know what to do to avoid losing your property. Knowing the 5-year rule gives you the timeline for when it could happen. If you are two or three years behind, you still have some time but if you have reached the 4-year mark, it’s time to do something now before it’s too late.
Some county tax collectors will let you make a payment arrangement to get caught up on your taxes but if you are too far behind, they may not agree to do so.
Another solution is to get a mortgage on the property to get the taxes caught up. In many cases, the new lender will want to have property taxes collected with your mortgage payment to prevent the same situation from happening again.
Delinquent property taxes don’t go on your credit report so they won’t hurt your credit score. This makes it possible to get a regular bank loan if everything else fits their guidelines. But if you can’t get a bank loan, hard money can be used to solve the problem if there is enough equity in the property.
Fortunately, hard money can be a fast solution to this. I have done multiple loans in the past to help homeowner’s save their property from tax sales. The first one I ever did closed in 4 days, closing on the final day before the auction. It was a close call because the client waited until the last possible moment to try to get a loan.
Yesterday, I got a call from a loan officer who has a client who inherited some properties and didn’t realize that because it wasn’t from a parent, the property taxes had increased after each property was reassessed. The client kept paying the old amount which is thousands of dollars less per year and is now in danger of having their these properties sold at auction to pay the delinquent property taxes.
To make matters worse, the properties this client owns are free and clear (meaning they have no loans on them). Yikes! That could be a disaster!
The loan officer who called me can now help their client save the properties with hard money loans as a temporary solution until a more long-term solution can be found. This will avoid the loss of hundreds of thousands of dollars.
For more information on how to get a hard money loan, regardless of the reason it is needed, fill out the contact form no this website or call today.
What is a Bridge Loan?
There is a common misconception that a bridge loan is just a short term loan. Correctly defined, a bridge loan is where someone is buying one property before selling another one and they need to get a short term loan until they sell the property they already own.
It is called a bridge loan because it bridges the gap between buying a new property and selling a property you already own.
The problem is that banks don’t do bridge loans. They focus on the very plain and uncomplicated loan types that don’t require a lot of expertise or creativity to figure out. This is probably because most banks sell their loans and the people who buy them are investors, not seasoned mortgage professionals.
One of the many different uses of hard money is the bridge loan. Hard money is the ideal vehicle for them because decisions in hard money are generally made by an individual and not a board of directors. And even if the individual who is lending the money isn’t an expert in mortgages, he or she can be educated quickly so that they understand.
So how do bridge loans work?
There are 3 ways to do a bridge loan:
1) The loan is secured by the property being bought.
2) The loan is secured by the property being sold.
3) The loan is secured by both properties.
Which one is best will depend on the situation. Some of the factors involved are how much down payment there is (if any), how much equity is in the property already owned, the value of the property already owned and the purchase price of the property being bought.
Most bridge loans are for 12 months or less although that can be negotiable. This is why some people think of any short term loan as a bridge loan.
One of the biggest advantages of bridge loans is that the requirement for proving income is waived for this type of loan, regardless of whether either of the properties will be owner occupied or a rental property.
If there was a single thing that one should know about bridge loans, it is that they are all about figuring out how to make the numbers work. Anyone who is expert at doing them should be able to figure out the numbers in a couple of minutes and let you know if there is a way to do the loan.
So if you have any questions about whether you qualify for a bridge loan or if one could solve the problem of trying to buy one property before selling another one, ask someone who has done them before.
Most people think that hard money loans (also known as private money loans) qualify as creative financing. But the truth is that just because a loan is hard money, it doesn’t mean that it’s creative.
Someone who has bad credit or a property that is in poor condition will probably have to use hard money for a mortgage. But it can be pretty straightforward and doesn’t need to be creative at all.
If you look at the facts, getting a higher interest rate and probably paying more points than you would for a different type of loan doesn’t seem very creative.
So what does a creative loan look like?
One example that we just closed this week involved a guy who wanted to buy a property but didn’t have any money for a down payment. And since there aren’t any loan programs for buying a rental property with no money down, most loan officers would have turned him down.
But that isn’t what happened.
It turned out that he owned another house that had a lot of equity in it. So instead of turning him away, we used that equity so he could buy the house he was interested in. The loan used both properties, being a first mortgage on the one he was buying and a second mortgage on the one he already owned.
Another example is a borrower who needed to refinance a property that had major fire damage. The property had 3 units before the fire and two units afterwards. Obviously, no bank would give anyone a loan on that property.
But we came up with a solution to it. Instead of going through the complicated process of doing a construction loan, we had the property appraised based only on the two remaining units.
Since the loan was based on the as-is value, there was no need to have any money held back to cover construction costs. The borrower had been looking for a solution for a while and was unable to find anyone to help them. Fortunately, the solution seemed pretty obvious to us and we got the loan done quickly.
There are many other examples of how to take a situation that doesn’t seem to have a solution and figuring out a way to be creative, coming up with a simple solution to get the problem handled.
So when you think of creative financing, it isn’t true that all hard money is the same. It is important to find someone who cares enough to look for the solution to your problem, whether that person needs to be creative or not.
The best way to look at it is to find out if there is a simple solution. Complicated doesn’t usually work and causes confusion. Simple is almost always better.
The banks will tell you that if you don’t have perfect credit, you can’t buy a home. This is false. There are actually many different ways to buy real estate when you have bad credit.
The fact is that there are many different loan programs available, not just the ones offered by the banks. Hard money is one of the better known loan programs but there are others that can work too. The one that is right for each person is the one that fits their circumstances.
Since hard money has been mentioned already, it will be covered first. Interest rates are usually higher than other mortgage types but most of them also have interest-only payments which helps keep the payments lower since you aren’t paying the loan principal every month.
Hard money, also known as private money, has the most lenient qualifying guidelines, making it easier to get approved. Down payments of anywhere from 30% to 40% of the purchase price are usually required and rates are usually in the 8 – 12% range although they can be higher or lower depending on the situation.
Most hard money loans don’t have any specific credit requirements but if your credit is really bad, you may need a bigger down payment than someone whose credit score is just a little too low for the banks.
Next is non-prime which is the much improved replacement for the old subprime loans. Non-prime loans have become very popular over the last few years but have become much less available due to the COVID-19 shutdown. They are still available, just not quite as much as they have been.
These loans were possible with as little as 10% down payment but that has recently gone up to 25% to 30% down and even more with some lenders. Interest rates have ranged anywhere from just above what the banks charge all the way up to the lower range of hard money.
Another advantage to non-prime loans is the ability to qualify by using bank statements instead of tax returns. This feature is specifically available to self-employed borrowers.
The third loan type that will be covered is the seller carryback (or seller carry), which is where the person selling the property also does the mortgage on it. Depending on the seller, these can be very flexible and in a market where loans are not as available or easy to qualify for, can become fairly popular.
Rates on seller carryback mortgages commonly range in the 6 – 8% range but can go higher or lower depending on the seller.
The beauty of a seller carryback is that they can be used in different ways. They can be done as a 1st mortgage where the seller carries the entire amount borrowed. They can also be used in combination with hard money, making it possible to buy a property with less down payment than what is normally required.
For example, if you only have 20% down but you can find a seller to carry a 2nd while you get a hard money loan for the first mortgage, you could still buy a property. To illustrate this, let’s look at a purchase for $500,00 where they buyer has $100,000 down payment.
If he can get a seller to carry a second mortgage for $100,000, the hard money lender could do a first mortgage for the remaining $300,000 and the purchase can take place. And since the rates for seller carryback mortgages are usually lower than hard money, the more the seller will lend, the lower the overall payment will be.
These three mortgage types are not the only ways to get a loan when the banks won’t do it but the are three common options.