Creative Real Estate Financing For Wholesale Deals

Creative Real Estate Financing For Wholesale Deals

This info is very important for both new and experienced wholesalers, AND buyers of fixer-uppers, to carefully read and understand. We learned it painfully, hopefully you won’t have to:-)

Often times we are asked by investors about using traditional financing for their investor deals. In other words, they want to go by a bank or other similar lending institution to buy a fixer-upper from us, or another wholesaler. The obvious advantage is that rates are cheaper, and the loan origination fees (many times referred to as “points”) are both much less than “hard money” (loans from individuals or small institutions specifically for investor kind similarities, with rates ranging from 5 points and 15% interest to 10 points and 18% interest). There are, however, some obstacles to using traditional financing of which you must be aware.

First of all, these banking institutions will only loan on inhabitable, decent condition character. So if the character you are considering needs major repairs, forget this kind of financing for the most part. Next is how you have structured the deal. Because of all of the recent frauds situations where edges have been burned, we have been unable to locate any traditional lenders willing to loan on a deal that has been “stated” from the Buyer listed on the buy and Sales Agreement to a third party. They require that the Borrower be the Buyer named in the Agreement. And they absolutely will not fund the Assignment Fee.

You can get around this if you can live with either of these solutions:

1. The wholesaler re-writes the Agreement with the Seller listing the new Borrower as the Buyer. This solves the paperwork issue. The Buyer will nevertheless have to fund the Assignment fee with some other source of funds. The wholesaler in this scenario is not protected because none of the paperwork demonstrates his right to buy the character, nor the assignment fee to be paid. A separate agreement would have to be established with all of the parties. You see how this can get very complicated and cumbersome. By the way, already if you have a cooperative Seller you can not just list the inflated price (original sales price plus Assignment Fee) on the Agreement with a stipulation that the Assignment Fee portion will be paid to the “Wholesaler” at closing, because then the wholesaler’s fee will show up on the Seller’s side of the Settlement Statement appearing as if he acted as a Real Estate Agent. observe: This may be OK if the “Wholesaler” is in fact an agent. They’d need to check with their Broker.

2. The wholesaler must become the owner of the character and in the chain of title. Then he can legitimately write an Agreement with the Buyer listing the complete price of the character including the assignment fee. The wholesaler can accomplish this with a cooperative Seller using short term Seller financing, “unprotected to” financing, or a short term bridge loan from a home equity line or private lender (usually friend or family). As long as the loan-to-value (LTV) nevertheless fits their requirements, the edges will loan on the new buy price – consequently funding the assignment fee.

The other item to keep in mind when considering traditional financing is that it is comparatively slow. Many mortgage brokers will tell you that their loans will be ready to close within 10 days to 2 weeks from submission. The reality is that they can only guarantee that they will course of action the loan and get it to a lender within a short period of time. With the current rush for refinances, most lenders’ underwriting departments are backlogged – and applications can get stuck there for a week or more. They will also issue conditions that must be met, then submitted back to underwriting for final approval. Then add another associate of days for the loan package to be prepared and sent to the attorney.

To be safe, you should count on three weeks to a month for a loan to close. If it closes sooner, you’ll be pleasantly surprised. If the deal doesn’t allow for that much time, you may want to consider different funding supplies so you don’t lose it all because time has run out and the loan isn’t ready.

traditional financing does have a place in wholesale deals. We’ve closed several ourselves – but it doesn’t work in all situations. You need to understand the time of action, and what will fly, and what will just kill the deal.

Best of success & abundance,

Lou Castillo

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