Auction Buyers – Blanket Mortgage or Blanket Deed of Trust

I was questioned recently about how to help borrowers buy at auction.

One of the biggest issues with lending on deals purchased at auctions is the fact of not being able to do adequate due diligence on the property before it is financed, since you don’t have access to the property. Even if you did have access it still is a challenge because it would require significant work without even knowing if your borrower will get the winning bid.

The strategy I like best for auctions is to use other qualified non-owner occupied property (owned by borrower or by collateral partner) as the collateral for your loan to the borrower, which will give your borrower access to the money needed to buy the auction property. Then once the auction property has been purchased using the cash from the cross property loan you as the lender can take the time required to do your due diligence on the auction property and place a new loan against it. This in turn frees up the original cross property loan money, which goes back into a joint escrow, so the borrower can do it again at the next auction sale. This can be repeated indefinitely, as long as the borrower is able to purchase at a good enough price to meet your lending criteria and as long as the borrower has enough skin in the deal to meet the underwriting criteria you have set for your lending business.

By cross partner I am referring to a non-owner occupied property owner that is willing to allow a borrower to use their property as collateral, usually in exchange for a part of the back-end profits. Very often this cross partner is a friend, business associate or relative that knows and trusts the borrower and believes the borrower will preform on the transaction.

Cross collateral property doesn’t necessarily need to be free and clear. It is possible to use properties that have loans against them but you want to be sure there is enough equity available in order to meet the lending criteria you have set.

If needed, in order to get the amount of security required, you can also use more than one property at a time as the cross collateral for your loan by securing it with a blanket mortgage or blanket deed of trust. A blanket mortgage or blanket deed of trust can encumber multiple properties allowing you to put a larger loan in place. If needed, individual properties under a blanket mortgage can be released one at a time by way of what is called a partial release. The terms of the partial release would be spelled out at the time that the loan is put in place. It typically requires a predetermined dollar amount of the loan to be paid off for the release.

This strategy can be perfect for borrowers that have access to more auction deals than they can fund. There are many borrowers that are willing to split profits on deals knowing that they can scale their business quickly.

When using this strategy it is important to work with well seasoned, experienced borrowers since buying at auction requires a very keen eye for a good solid deal. The risk with this strategy, if done right can be quite low since you can structure the deal to have plenty of collateral. If the borrower pays too much for the auction property you have a buffer since you still have the cross property.

Please feel free to post your comments and questions.

Until next time…Happy Lending!

Tom

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