How to use hard money to get great buys at real estate auctions.

Once reserved for desperate sellers, the auction process is now coming into its own. Many smart property owners, working with their real estate brokers, are finding that auction houses can be a help to them on both the buy and sell side.  On the sell side the exposure to a national audience can promote both faster closings and appropriate sales prices. On the buy side, investors and developers are now recognizing the value of checking out commercial and investment purpose residential properties on the various auctions sites. One down side of purchasing a property at auction is the short time frame allowed to obtain financing. In Colorado, many buyers are working with Montegra Capital to obtain the funds they need to meet the quick turnaround times that auctions demand.

John Owner Decides To Sell.

Let’s assume that John Owner decides to sell his industrial warehouse property which he has recently vacated. This property has been listed by his commercial real estate broker over the past year, but due to the fact that the property is now vacant and there is a soft industrial market in Denver,  no acceptable offers have been received.

After a year of trying to sell, with no buyer in sight, John decided that he needed to get out from under the property’s negative cash flow sooner than later.  A business associate of Mr. Owner suggested he consider a commercial real estate auction. He checked out several of the national online auction companies before deciding to work with a Denver based firm which agreed to take all responsibility for creating a marketing package, setting up advertising and publicity, and to arrange the location from which to auction the property.

The arrangements for the auction took several weeks, but once complete, the advertising commenced and the property was available to be seen by prospective buyers at appointment 30 days prior to the sale date. The price for the warehouse was set at $1,000,000 which John Owner felt was an acceptable price if it could be sold quickly.

Peter Purchaser Decides to Buy

Because the auction company’s advertising had a national reach, an investor from California named Peter Purchaser became interested in the property. After inspecting the property two weeks prior to the sale date, Peter decided this was a good value and elected to make a bid for the full suggested price.  However, Peter only had $600,000 in ready cash available at this time. He understood that the entire $1,000,000 purchase price had to be paid in cash within 30 days from the date of the auction.

Traditional Lender Can’t Close the Deal

Peter spoke to his bank in California, but they were reluctant to loan on a property in Denver. He then contacted two banks in Denver, but both told him that because the property was empty they would not make a loan.

A Private Lender Underwrites the Loan

Having been referred to Montegra by the auction company, the Peter Purchaser spoke Bob Amter (the President of Montegra), and within two days Bob offered him a term sheet for a $600,000 loan with a $400,000 cash down payment. The commitment letter followed immediately and Peter knew that he had the funds to close this purchase within the 30 day time frame.

A Happy Ending

The transaction ended happily for  John Owner who got his money out of the building. It ended happily for  Peter Purchaser who was able to close on the building in a timely way.  It ended happily for the auction house who received their commission and the satisfaction of being able to demonstrate how auctions (with the right financing connections) can get the job done. It ended happily for Montegra with the satisfaction that, once again, their flexible asset based lending program had enabled it to fund the commercial real estate loan the borrower needed in a timely way.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  [google_authorship] has been in the private capital lending business for 41 consecutive years.