What makes real estate valuable?
If your answer is “location,” you’re on the right track. As any successful investor or industry professional knows, the three most important factors for a piece of real estate are location, location, location.
But location aside, there are plenty of other factors that impact a property’s value. Scarcity and demand are two that come to mind. The more rare a piece of real estate is, the more demand there will be. And with demand comes an increase in value.
Similar characteristics hold true for other assets, including gold and silver, stocks, bonds, and mutual funds. The levers of supply and demand have a direct influence over asset valuation.
But assets don’t have to be physical. As the digital world expands and more of our daily lives become virtual, it’s clear that digital assets have value as well.
A website is basically a piece of virtual real estate. Once you own a website, you have complete control over how you leverage your little corner of cyberspace. And, as is the case with physical real estate in the real world, your domain is unique to you. It can’t be replicated or reproduced.
Domain name supply is finite – there are only a certain number of names and character combinations. And the demand for domain names is only increasing. Thus if you own an attractive domain, it’s almost certainly increasing in value. And if you want to buy an attractive domain name, it can be pretty expensive.
Depending on which side of the marketplace you’re on, you have the ability to leverage resources for or against a domain name. As a buyer, you can secure financing to acquire the domain name that you want. As the owner, you might be able to lend against your domain name to unlock money that can then be used to grow your website or business in other ways.
The world of domain name financing is still relatively unknown and untapped. Few outside of this niche know about it or have any experience utilizing it. But that’s about to change. As domain names become seen as more than web addresses and recognized for the valuable assets that they are, more people will tap into the leverage and power that financing provides.
Let’s begin by understanding how domains are purchased. If you’re interested in buying a domain name, the process traditionally goes something like this:
In a perfect world, the domain you want is both available and inexpensive. Non-competitive domain names can often be purchased for less than $15 for the first year. But what happens if the domain you want is taken and/or commands a high price?
In certain cases, you’ll find that the domain name you want is currently owned and parked by someone else. It may have a sale price attached to it, or you might be able to contact the owner and ask about purchasing the website.
Other domain names can be bid on or purchased for a hefty price tag.
Here’s a look at some of the most expensive domain names of all time:
These are just a few of the most expensive domain names ever purchased. And while you’ll probably never be in the market for a seven-, eight-, or nine-figure domain name, it’s possible that you’ll find yourself in a situation where you need to buy a five- or six-figure domain name. And in these cases, you have a few options:
Domain name financing looks like almost any other form of financing – whether it’s a house or a car. You work with a lender who pays the full purchase price to the seller. The lender then takes possession of the domain name – giving you the rights and use of it – and requires regular payments to satisfy the remaining portion of the debt. (You basically make a mortgage payment on your domain name.)
There are a variety of situations where financing the purchase of a domain name makes sense:
If you find yourself in a situation where you need to finance the purchase of a domain name, it’s imperative that you do your research. This industry has a lot of small players, and you want to be sure you know exactly what you’re entering into. Here are a few tips:
Just because you’re financing the purchase of a domain name, doesn’t mean it’s free money. Sure, it’s not all coming out of your bank account today, but it will. The monthly/quarterly payment matters, but consider the overall price as well. Set a budget, stick to your guns, and don’t let financing options cause you to pay more than you should.
There aren’t a ton of domain name lenders, but there are a few. Shop around and look for the best rates and terms (much like you would when taking out a mortgage to buy a house). A slight difference in rates or fees could end up saving you thousands of dollars.
You might enter into an agreement to buy a domain name for $25,000, but that’s the cash price. If you’re financing the purchase, you’re going to pay interest over time. Depending on the interest rate, the length of the loan, fees, and other factors, you could end up paying an additional 10 to 20 percent over the life of the loan. (There’s nothing wrong with this – it’s the price of doing business – but it is something to factor into the equation.)
Now let’s switch roles. Up until this point, we’ve discussed domain name acquisition and financing. But what if you’re the owner of a domain name? Did you know that there are ways to use your domain name to increase your borrowing power?
Rewind to our discussion of assets at the beginning of this article. As mentioned, a domain name is a virtual asset with tangible value. And much like you can borrow against a physical asset – such as your house – it’s sometimes possible to borrow money against a domain name.
The key word in that last sentence is “sometimes.” Not every domain name has enough value to be leveraged. Most domain names are worthless and/or have a maximum value of several hundred dollars. And nobody is going to lend you money against an asset that doesn’t have considerable value.
But if you have a website that’s worth something and you need some cash to invest in another area of your business, this could be an option worth pursuing. However, it’s not as easy as driving down to the local bank or credit union and asking for a loan.
“Commercial banks are not equipped to make loans against domain names,” UnusualInvestments.com mentions. “Unlike lending against real estate, there is not a highly accurate and government-regulated process when it comes to appraising domain names. Loan officers and loan committees don’t understand domain names, and their high fixed costs don’t lend themselves to fooling around with small loan sizes. Banks have to comply with regulators that might question a loan against something they consider an intangible or blue sky.”
In other words, you’re going to need an alternative lender or private lender – someone who understands the marketplace for domains and can accurately evaluate your digital asset.
Two of the most popular private domain name financing companies are Lendvo and Domain Capital. Both offer very similar services and options. Loan terms usually run for up to two years, and monthly interest rates may fall in the one to three percent range (depending on the state of the market).
One of the best parts about these types of loans is the flexibility. You’ll have to read the fine print, but in most cases, you can do with the money what you please. This may include buying another domain name, enhancing your website, investing in marketing, or even taking the cash to buy an investment property.
As is the case with other forms of secured loans – like a home mortgage – you commit to repaying the loan according to the payment schedule. Should you miss payments and default on the loan, the lender has the ability to seize the domain and take ownership. (In fact, registration is usually changed to the lender when the loan is taken out. This assures the lender that they can take immediate access to the website should something go wrong. Once you pay off your loan in full, ownership is transferred back into your name.)
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