Many real estate buyers know that there are fantastic deals available in the real estate market. The slew of bank foreclosures has led to a tidal wave of bank-owned REOs that have flooded the market with low-priced properties. Astute investors are taking advantage of this situation to buy homes at bargain prices.
If you’re considering investing in bank-owned property, you’ll need to be a cash buyer. This means you must show “proof of funds,” which is usually a bank statement showing you have the cash on hand to purchase the home.
If you don’t have the cash on hand, you’ll need to borrow the money from someone who does. If you have a relative or friend with access to cash, they may be willing to lend you money to buy a property in exchange for a first mortgage on the property. They will effectively become the bank and you will be required to make a monthly payment to them.
There are professionals in the real estate business who make these types of loans to people who are not relatives. They are called hard money lenders. The only difference between a hard money lender and a private investor is the interest rate. Borrowing from Aunt Sallie might cost you 8% per year in interest. A typical hard money mortgage in today’s market would be 15% plus 3 points up front.
Why would someone borrow money at such a high interest rate? Let’s see an example. Suppose you could buy a bank-owned REO property for $40,000 when the house has an actual market value to a cashless buyer of $80,000. Paying 15% interest on a $40,000 loan equals a monthly payment of just $500.
Suppose you waited 90 days to get title and then sold the property to an FHA first-time homebuyer for $79,900. Suppose you paid a 6% commission to the real estate agent and another 6% to pay the buyers’ closing costs. He would still net $70,000 from this transaction. After paying the hard money lender the $40,000 he borrowed, he would still have a profit of $30,000 left. Even if he held the house for six months before finding a buyer, he would only have spent $500 a month on interest for 6 months. His total interest cost alone would have been $3,000. This would leave you with a net profit of $27,000.
Or put another way, without using any initial money (by borrowing all the money) you could make a profit of $27,000. How easy would it be to sell a house like this to a first time homebuyer? The answer is that it would be extremely easy. Buyers are putting down just $3,000 (3 ½%) to buy a home with a monthly mortgage payment that is almost equal to their monthly rent. You are paying all of your closing costs. And the government will give them an $8,000 tax credit if they buy before the end of 2009. Everyone wins. The bank can quickly sell your property to a cash buyer. The cash buyer can switch ownership and make a quick profit and the ultimate FHA buyer can own a home for the same monthly payment as rent.
The trick to the transaction above is to find an $80,000 property that you can buy for $40,000. This is the part that requires training, knowledge and experience. Finding deals like this is an art form and the people who find these deals are known as “bird dogs” or “property scouts.”
Many bird dogs sell their deals to investors for cash for a small profit. This is known as wholesale. For example, a wholesaler might contract to purchase the old house for $40,000 and then sell it for $45,000 to another investor for cash. In this way, the wholesaler does not need to borrow money from a hard money lender. The wholesaler simply finds a deal, signs a contract to buy it, and then trades the contract to an investor for cash to make a profit. This is known as “assignment of a contract” and the profit paid to the wholesaler is known as the “assignment fee”.
Banks don’t want wholesalers to change the contracts on bank properties. For this reason, banks do not allow assignable contracts. This means that a wholesaler cannot transfer property from a bank to another investor for cash. The reality is that there are still ways to assign a property. One way is to buy the property in a land trust and then assign the beneficial interest in the land trust. Another way is to buy ownership in an LLC and then assign the membership interest in the LLC. However, the problem with these methods is that the ultimate buyer may not want to have a land trust or LLC.
For this reason, the best way to sell a property from one bank to another investor for cash is to have what is known as a double closing. This means that the wholesaler essentially buys the house from the bank and then simultaneously, on the same day, sells it to another investor for cash. The downside is that the wholesaler will pay double the closing costs.
If a wholesaler has a signed contract and wholesales the deal to an end buyer, then if the wholesaler is short on cash, they may need what is known as “transactional financing.” Transactional financing is perfect for bank properties and short sales offered by a wholesaler to an end buyer. Since banks do not allow assignable contracts, the wholesaler will need to schedule a double closing with the final buyer. Double closings, also known as simultaneous closings, allow a wholesaler to schedule two consecutive closings for the same property on the same day. The wholesaler must have a source of funds to pay for the first transaction. This is where transactional funding (also known as same-day funding) is needed.
Our company offers transactional financing to all of our private tutoring students. However, our students must schedule both closings with our title company in order for us to offer the transactional financing. We will only offer transactional financing if both closings are with our title company (independence title and escrow).
If you are looking to trade a property from a bank, you will have two contracts and two closings. The first contract is between the bank (seller) and you (buyer). The second contract is between you (seller) and your ultimate buyer (buyer). The ultimate buyer is the person who will ultimately be the long-term owner of the property.
Example:
A bank
b-you
C – Ultimate Buyer
Suppose you have a contract with the bank to purchase a property from the bank for $40,000 (first contract). This is known as the AB transaction.
You market this property to your cash buyers and find a buyer at $45,000. You enter into a contract with this buyer in which you are the seller and he is the buyer (second contract). This is known as the BC transaction.
The difference between the two contracts (after deducting closing costs) is your profit to walk away with. As there are two contracts there are two closures. This means that you will pay double the closing costs.
The transactional financing fee we charge is 2% +$495 with a minimum fee of $1,250. For example, if you were requesting $40,000, your fee would be $800 + $495 = $1,295. We will only provide transactional funds if you use our title company (independence title) for both closings.
For more information on transactional financing, visit http://lexlevinrad.com/transaction_funding.html
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