Conventional Financing for Wholesale Deals

jtbrown54 profile photo

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 grin



Often times we are asked by investors about using conventional financing for their investor deals. In other words, they want to go through a bank or other similar lending institution to purchase 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 type properties, with rates ranging from 5 points and 15% interest to 10 points and 18% interest). There are, however, some obstacles to using conventional financing of which you must be aware.



First of all, these banking institutions will only loan on inhabitable, decent condition property. So if the property you are considering needs major repairs, forget this type of financing for the most part. Next is how you have structured the deal. Because of all of the recent frauds cases where banks have been burned, we have been unable to locate any conventional lenders willing to loan on a deal that has been “assigned” from the Buyer listed on the Purchase 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 still 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 purchase the property, 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, even 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. Note: 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 property and in the chain of title. Then he can legitimately write an Agreement with the Buyer listing the full price of the property including the assignment fee. The wholesaler can accomplish this with a cooperative Seller using short term Seller financing, “subject 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) still fits their requirements, the banks will loan on the new purchase price – thus funding 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 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 process 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 couple 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 alternative funding sources so you don’t lose it all because time has run out and the loan isn’t ready.



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



Best of Success,

Joe and Lou

Comments(10)

  • DaveT3rd November, 2003

    There is a solution for your first scenario. The buyer and seller rewrite the contract at the higher sales price, AND the seller gives the investor a performance mortgage for the "assignment fee". The investor records the performance mortgage, which appears as a second lien on the property. The investor is paid at settlement when he gives the settlement attorney a release of the lien.

    • boyd44443rd November, 2003 Reply

      Why not just do a simultanious closing? You close your deal with the seller for what they owe, then an hour later close with the investor at the new purchase price. Just make sure you don't run into seasoning issues with their lender.

      • DaveT3rd November, 2003 Reply

        In essence, that is exactly what Scenario #2 is all about.



        I was only suggesting an alternative to scenario #1 that would still fund the investors assignment fee from the settlement proceeds.

      • Elynda4th November, 2003 Reply

        Hi Boyd4444,



        I heard this term, but not sure how is the system working. could you please explain from the beginning? Just make up a classic scenario. Thanks.



        Elynda

    • moneyprivate4th November, 2003 Reply

      I would rather get shot in a hunting acciedent and get run over by a truck than do a 203k Loan. They have to do a feasability study first which can cost about 1500 dollars. If you can find someone to do it they only have a few people that can do it so you really have to suck up to them. I can take several months The best and fastest way (2 to 3 weeks) if you have the credit and if you can fully document your loan (w2s paystubs) is to use a bank for a rehab or construction loan they specialize in these.

      • Lufos4th November, 2003 Reply



        203K pain in the neck. I do the studies and am approved to produce this most worthless of documents. It says the property needs the work, spells out the work and then makes a statement, fingers crossed that the property will be of the designated value upon completion. duh. Takes me six days. with a good digital camera and a favoring wind 4 days.



        Cheers Lucius

  • thewhtridr4th November, 2003

    I am a mortgage broker that handles all sorts of properties including rehab projects. That being said, FHA has a program for properties that are in need of a lot of work called a 203k loan. Its the only loan FHA will do for investment properties but they will fund not only purchase price but a good portion of the repairs and improvements. The only catch is that you have to work with an FHA approved contractor and the two of you have to agree on what improvements to make. The rates are decent, the credit requirements are flexible and the only fee by fha is a 1.5 points fha mortgage insurance.

    • dirtman894th November, 2003 Reply

      Before you get stuck, a correction to your statement is that Investors are NOT allowed.

      Owner-occupied properties only.



      The 203(k) loan program offers borrowers the resources to rehabilitate a home that may be in need of repair, either the home that they currently live in, or that special fixer-upper opportunity. One single loan is used to pay for the purchase (or refinance) and the cost of renovating the home.

      Made available to certain lenders by the U.S. Department of Housing and Urban Development (HUD), the FHA 203(k) program has already provided many buyers with the funds necessary to buy their first home, or greatly improve a current home. The FHA 203(k) loan is available to borrowers of all income levels, to homeowners who plan to occupy the house, and for homes with one to four units.





      203K Eligible Borrowers:

      Owner Occupants - Purchase - Refinance

      Non- Profits

      Investors NOT allowed


      • moneyprivate4th November, 2003 Reply

        I would rather get shot in a hunting acciedent and get run over by a truck than do a 203k Loan. They have to do a feasability study first which can cost about 1500 dollars. If you can find someone to do it they only have a few people that can do it so you really have to suck up to them. I can take several months The best and fastest way (2 to 3 weeks) if you have the credit and if you can fully document your loan (w2s paystubs) is to use a bank for a rehab or construction loan they specialize in these.

    • boyd44444th November, 2003 Reply

      O.K. Elynda here goes...

      A simultanious close is when you have two actual closings on the property with one title company usually within a twenty-four hour period.

      Closing #1:

      You buy the property from the seller for $100,000. at 12:00 P.M.

      Closing #2:

      You sell the property for $115,000 at 12:30 P.M. to your buyer.

      The trick to this is finding a title company that will allow you to do closing #1 with the funds given to you from close #2. In essence, they know the money will be there in a 1/2 hour so they go ahead with they signing of the first set of docs. If you search hard enough you will find someone that will do this for you. I have a company right now that because the group of people I work with bring them enough business, I only get charged closing costs once ( I still have to pay transfer tax twice) I would suggest a CYA (cover your ASSets) clause in your agreements if you are going to attempt this in case for some reason close #2 falls through.

  • jeffcc8th November, 2003

    (In the case of the investor as the Buyer)

    If the work needed is not major rehab, then the bank may give the loan subject to completion of renovations. The Buyer needs to get a Scope of Work with estimate from a bank-approved contractor. Then the appraisal should be Subject-2 competion of renovations, this way the appraisal will be a higher amount. The Loan amount has to be enough to pay liens, contractor, even personal loans, and any leftover, if a refi, to the Investor! I am doing one right now: Bought for $40k Sub-2, refied 80%ltv with $95k appraisal Sub-2 renovtn, Scope of Work $30k, paid a $15k personal loan at loan close. The best part is the bank is giving me the renovation money directly, so I can use my own handyman! 1/2 off renovations! When the final inspection is done, I will have cash in my pocket of about $2-3k with a beautiful house that will rent out for $1250/mo Sec.8 or Military ( 3Bed- Guam,USA)! I hope this sharing will be helpful for others as I have earned much from others shared experiences.

Add Comment

Login To Comment