Real estate investors are always looking for an edge. They are always interested in finding new and creative ways to obtain the properties they want. One of the more complex strategies is combining hard money with hypothecation. Although doing so can be complicated, pulling it off can give an investor access to some pretty lucrative opportunities.
Hard Money and Property Investing
Let us look at each of the two components that go into hard money and hypothecation. Hard money is essentially private lending based on asset value. A firm like Salt Lake City’s Actium Partners writes a loan that provides funding for an investor looking to buy a new property.
Hard money is valuable to investors because it is easy to come by compared to conventional funding. Hard money lending is also faster. Because they are private lenders, hard money firms can do things differently. They can approve, underwrite, and fund a loan in a matter of days.
The Hypothecation Principle
Hypothecation is a unique way of obtaining property. It involves distressed properties, which is to say properties that are already in foreclosure. The fact that foreclosure has begun means that either the bank already owns the property or is well on its way to becoming the owner.
A bank-owned property is saddled with a note representing the amount of the original mortgage left unpaid. The bank also owns the deed to the property. Hypothecation is a strategy of purchasing both the note and deed at a discounted price.
Here is a simple enough example: a bank owns a foreclosed property with an outstanding note of $100,000. In order to avoid the hassles of taking over the property, cleaning it up, and then getting it back on the market for sale, the bank would rather just sell the note and deed to an investor and be done with it. They offer a sale price of $50,000 to get the deal done.
The investor then turns around and approaches a hard money lender looking for money to complete the deal. He has $30,000; he wants the hard money firm to provide the remaining $20,000.
The Note Is Collateral
The fascinating part of hypothecation is the collateral aspect. As Actium Partners explains, hard money borrowers need to put up collateral to get their loans. In almost all cases, the collateral is the property being obtained. But in a hypothecation scenario, the investor is not actually buying the property per se. He is purchasing the note and deed.
He is expecting the hard money lender to accept that note and deed as collateral. That’s because the deed will be transferred to a third-party trustee until the borrower pays what he owes. He will not actually own the property until the deed is transferred back to him.
In practical terms, the distressed property is still collateral for the loan. But legally speaking, it is the outstanding note indeed that the investor is actually purchasing. He converts the note and deed into property he owns by completing the deal and satisfying both the bank and hard money lender.
Not for Everyone
It goes without saying that hypothecation is not for everybody. It’s a complicated way to turn distressed real estate into profit. But an investor really needs to know what he is doing to do it safely. Not only that, not every hard money lender is willing to participate in hypothecation. As such, it is not a strategy that a lot of property investors pursue. Those who do, and do it well, stand to make good money on distressed properties.
