Creative real estate financing for wholesale deals

This information is very important for both new and experienced wholesalers, AND repair home buyers, to read and understand carefully. We learned it the hard way, hopefully you won’t have to 🙂

Investors often ask us about using conventional financing for their investor deals. In other words, they want to go through a bank or other similar lending institution to buy a house in need of repair from us or from another wholesaler. The obvious advantage is that rates are cheaper and loan origination fees (often referred to as “points”) are much lower than “hard money” (loans from individuals or small institutions specifically for investment-type properties, with rates ranging from 5 points and 15% interest to 10 points and 18% interest). However, there are some obstacles to using conventional financing that you should be aware of.

First of all, these banking institutions will only make loans on uninhabitable properties and in decent conditions. So if the property you’re considering is in need of major repairs, forget about this type of financing for the most part. The following is how he structured the deal. Due to all the recent bank-burning fraud cases, we have been unable to locate any conventional lenders willing to lend on a deal that has been “assigned” by the Buyer listed in the Purchase Agreement to a third party. They require the Borrower to be the Buyer named in the Agreement. And they will absolutely not fund the allowance fee.

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

1. The wholesaler redrafts the Seller Agreement listing the new Borrower as the Buyer. This solves the paperwork problem. Buyer will still have to finance the Transfer fee from some other source of funds. The wholesaler in this scenario is not protected because none of the procedures proves his right to buy the property, nor the transfer fee to pay. A separate agreement would have to be established with all parties. You see how this can get very complicated and cumbersome. By the way, even if you have a co-op Seller, you cannot simply list the inflated price (original sales price plus Assignment Fee) in 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 they were acting as a Real Estate Agent. Note: This may be fine if the “Wholesaler” is in fact an agent. They would have to check with his broker.

2. The wholesaler must become the owner of the property and the chain of ownership. He can then legitimately draw up a Buyer Agreement listing the full price of the property, including the transfer fee. The wholesaler can accomplish this with a cooperative Seller using short-term Seller financing, “subject to” financing, or a short-term bridging loan from a home equity line of credit or private lender (usually a friend or relative). As long as the loan-to-value (LTV) ratio still meets their requirements, banks will lend on the new purchase price, thus financing the assignment fee.

The other item to keep in mind when considering conventional financing is that it is relatively slow. Many mortgage brokers will tell you that your loans will be ready to close within 10 days to 2 weeks of filing. The reality is that they can only guarantee that they will process the loan and deliver it to a lender in a short amount of time. With the current rush for refinancing, most lenders’ underwriting departments are backlogged, and applications can get stuck there for a week or more. They will also issue the conditions that must be met and then they will be sent back to the subscription for final approval. Then add another couple of days for the loan package to be prepared and sent to the attorney.

To be on the safe side, you should have three weeks to a month to close on a loan. If it closes earlier, you’ll be pleasantly surprised. If the deal doesn’t allow that much time, you may want to consider alternative financing sources so you don’t lose everything because time is up and the loan isn’t ready.

Conventional financing has a place in wholesale offers. We have closed several ourselves, but it doesn’t work in all cases. You need to understand the process, and what will fly, and what will kill the deal.

The best of successes and abundance,

louis castillo