It’s all about the opportunity when it comes to buying property. For the investors, here is how to buy a house while selling your own through bridge financing.
Are you trying to buy and sell a house at the same time? Maybe you need a financing option to help you do it? Perhaps you’ve tried a few different ways to buy a new home while selling your current home?
If traditional lending methods have failed you; listen up. Read below to learn how to buy a house while selling your own.
Bridge Financing: What is it?
Bridge financing is pretty much what it sounds like. It bridges a gap between two entities. The bridge usually comes in the form of a loan called a “bridge loan“.
To be more technical, a bridge loan is an interim financing option that is used by companies or other entities as a short term financing solution until a long-term option can be found.
Bridge financing also fills the gap from when a company runs out of money and when it expects to get money in the future. Most of the time this kind of financing fulfills the need for the short-term working capital of a company.
Sometimes bridge financing doesn’t include a loan and is done by an equity-for-capital exchange. It can be used for IPOs (Initial Public Offerings) as well. They are usually short-term loans with very high interest.
It takes the form of equity or debt and might be used during an IPO offering. When a company receives equity bridge financing it gives up a stake in the company in order to receive the money.
If used for an IPO the costs are paid for until the company goes public.
Bridge financing typically comes in the form of an equity investment from a venture capital firm or an investment bank.
How Does it Work?
You can arrange bridge financing in several ways. You need to figure out which one best fits your situation. If you or your company is in better financial shape you’ll have more bridge financing options.
The three options you have for bridge financing are:
- IPO Financing
Equity Bridge Financing
Equity Bridge Financing happens when a company offers a venture capital firm part ownership of its equity. In turn, the company gets several months or a whole year of financing.
Many companies choose to use this method so they don’t have to incur high-interest debt. Venture capital firms typically only provide this type of bridge financing to companies they believe will be profitable in the future.
If that happens, firms or direct private money lenders that lent the money will see an increase in their stake.
Debt Bridge Financing
A company can take out a short-term high-interest loan if they choose. This is a bridge loan or debt bridge financing.
If you do take bridge financing you need to watch out that the extra high interest doesn’t put you further in debt so you or your company can’t recuperate.
One example of this is as such. A person or entity is approved for a $500,000 loan from a bank. The loan gets broken up into tranches. At month six your company is supposed to have the first tranche.
You can get a bridge loan so that when that tranche comes up you have enough capital to survive until the original loan arrives in your business account.
IPO Bridge Financing
Many companies choose to use bridge financing before their company puts out its IPO. These loans are meant to cover expenses for the IPO.
They’re mainly short-term loans. Once the IPO is done, the loan is paid off by the cash raised from the offering.
IPO Bridge Financing typically comes from underwriting by the investment bank. The underwriters then receive shares at a discounted price as their payment. This offsets the loan. Think of it as a forwarded payment. Payment for the future sale.
Put it Into Practice
Now you know how bridge financing comes about for businesses, now it’s time to put it into practice for you and while selling and buying a home at the same time.
You’re ready to buy a second home. But, you can’t do it until you sell your first home. Unfortunately, you might find yourself in a situation where the closing dates of the buy and sell aren’t the same.
If you have to close the purchase on your new home before the closing of your current home you’ll need bridge financing or a bridge loan. You’ll need a short-term loan so you can get access to the money from the sale before it goes through.
Break it Down
So, you’ve accepted an unconditional offer on your current home to be bought on April 10. After all your costs and paying off the mortgage, your net proceeds are $200,000.
After that, you purchase a home and you want to take ownership or possession on March 15th. This house costs 300,000. You put in a $50,000 deposit and choose to use an extra $150,000 of the proceeds from the sale of your current home.
You then get approved for a $100,000 loan to cover the difference. You need to use the $150,000 from the sale of your current home but it won’t be available until April 10. You can get a 25-day bridge loan at say 6%; at a total cost of about $200.
The usual time table from lenders between your buy and sell dates is 30 days. These types of loans are always higher than any traditional loan rates might be.
The reason for this is because they are short-term and unsecured. Also, the lender is putting up the entire purchase price of the home while the bridge loan is in effect.
When you do complete the purchase on the new home, you’ll need to sign a Letter of Direction and Irrevocable Assignment of Funds. Basically it ensures you pay the bridge loan with the proceeds from the home you sell or sold.
How to Buy a House While Selling Your Own
Buying a second home before selling the first can be very tricky. Even if you have a decent amount of equity you’ll most likely have to do some maneuvering. That’s where bridge financing comes in.