Can you use financing for off-market wholesale real estate?
The short answer is yes, however not all loans are created equal. Some lenders will not finance these purchases either because of the property’s condition, the inability to appraise the property, or simply because an assignment is involved. The good thing is that there are still plenty of financing options for off-market real estate, so let’s start with the type of loans that are permitted.
Valid loans accepted when financing off-market wholesale real estate include; hard money loans, commercial loans (local bank or credit union), lines of credit, and private money loans.
Hard money loans are short-term loans backed by the repair value of the purchased property. They are provided by private lenders or companies who are often themselves investors. Most hard money loans are for 12 months to five years and are obtained in days, making them ideal for a wholesale transaction.
Commercial Loans include portfolio loans from local banks or credit unions, typically requiring a 20-25% down payment and terms ranging from 12-month interest-only, five-year ARM to a long-term product with 15, 20, or even 30-year terms. Making this product a great option in a wholesale transaction because of the product’s flexibility, but typically longer to secure financing versus hard money or private loans.
Private money loans can also be used for the purchase off-market property. A private loan is a loan between two individuals. The primary source of a private money loan is typically a family member, friend, or real estate investment group. Private money loan terms and interest rates can vary significantly, from highly favorable to predatory, depending on the relationship between the borrower and the lender.
Lines of credit are obtained by drawing equity from a home you already own through a home equity line of credit (HELOC) or cash-out refinance on an investment property. In this case, the borrower uses the equity in their home as collateral, opposed to the subject property being purchased. Once the line of credit is secured, the line acts as cash in the purchase transaction.
Lastly, conventional loans can work but, they are not ideal. Not all lenders will allow it, making it difficult to secure financing. These loans should be avoided when considering off-market real estate. Loans like FHA, VA, and USDA do not allow the purchase of off-market wholesale real estate whatsoever.
All lenders’ rules and guidelines vary drastically across the industry, so please be sure to consult a licensed professional before entering into a purchase agreement on any property.