Although most people have heard the term bridge financing, very few understand what it is and how it works. Recently plenty of clients have come into our offices in need of this type of financing. I figured I would take this opportunity to demystify this sometimes overlooked and deal saving solution.
First, let us look at the definition of what bridge financing is as found on Wiki.
Bridge financing is a method of financing, used to maintain liquidity while waiting for an anticipated and reasonably expected inflow of cash. Bridge financing is commonly used when the cash flow from a sale of an asset is expected after the cash outlay for the purchase of an asset.
Okay, all of that is fine and dandy but how does this apply to real estate and why are we talking about it here?
My clients John and Sue (real names kept confidentially) recently approached me with a situation. John and Sue had put their home on the market and had accepted a promise to purchase from a young couple that wanted to take possession of the home in late January 2013. The purchasers gave John and Sue everything that they asked for and as such John and Sue were okay with waiting a few months to make the sale. The problem came when they found the home of their dreams. It was everything that they ever wished for and more. However, the vendors of that home required that the transaction is completed by the end of the year December 2012. This caused John and Sue problems because the funds for the down payment of the new home was coming from the sale of their current home. Prior to visiting me, they tried to get the purchasers to readjust the date to the end of December, however, the date had to remain because the purchasers were going to be traveling and as such the only time that they were available for the transaction was at the end of January 2013.
The recommendation I had for my clients was a bridge. The lender that we used to get them financing is to give in December the necessary funds to complete the purchase of the new home including the down payment. Upon the sale of the existing property, in January, the notary will then reimburse the lender the money that was lent to John and Sue for the down payment. In this way, John and Sue’s Lender is “Bridging” them until the sale of their home for the sum of the down payment.
As you can see, it actually sounds a lot more complicated than what it actually is. A few very important points to remember when using a bridge…
1) To qualify for a bridge you must have an unconditional sale agreement on the home you are selling
2) Make sure your lender offers the bridge service
3) Make yourself aware of any fees the lender may charge for this service
4) Always ask what is the interest rate for the period of the bridge
5) Find out what is the time limit on that bridge seeing as it can vary between lenders
As always I am available to answer any and all questions or comments you may have on this subject and I look forward to hearing from you guys.