Real Estate Funding – Is there a more profitable way to finance your deals?
I have been funding transactional or “same-day” closings for real estate investors for many years. This same-day real estate funding allows investors with no money and/or bad credit to do wholesale deals and make substantial profits. Occasionally these investors have had to put up an Earnest Money Deposit (“EMD”) when they contracted to buy the property. These amounts are very small in comparison to the amount of money they need to close.
A wholesale “flip” is often referred to as an A – B and B – C transaction or “double closing”. The letter “A” refers to the original seller. Letter “B” refers to the investor. Letter “C” refers to the end-buyer. At the closing table, the original seller closes with the investor who borrows enough money to purchase the seller’s property and just for long enough to close. As simultaneously as possible the investor then closes with his end buyer and pays off the transactional funder. The investor wholesaler then pockets the profit on the deal. His only investment is his EMD. In many cases that EMD can be “zero” when you better understand the funding process.
I would say that 80% of the time both closings are done on the same day. In 17.5% of the closings, the B – C closing takes place within three days. As for the final 2.5% the deal doesn’t close at all as the investor expected because the end-buyer defaults on the purchase. There are a number of remedies for making sure your end-buyer comes to closing but that’s not for this discussion.
I believe 75% of these wholesale deals are done with cash buyers only. Banks will not loan 100% of the purchase price as transactional funders do. The other 25% are funded by hard money lenders who are nicknamed “Predatory Lenders”. The name simply comes from them only loaning money after evaluating what happens if they have to foreclose to get their money back. Typically they loan 70% to 80% of the purchase price of the property. They have strict guidelines to qualify a borrower.
Our issue as transactional funders is that too many times the end-buyer’s hard money lender “changes” his mind at the last minute and doesn’t close. At this point everyone in the transaction including the closing agent, Realtor®, seller, investor and end-buyer are losing money – except the hard money lender! We have even seen where hard money lenders offer to change the terms of their funding to become a partner of the end-buyer. They can also simply pack on more junk fees, closing points and increase the interest rate on the loan.
There is a solution and that’s to combine transactional funding with “known” hard money lenders to fund the end-buyer. I call this type of funding “Dual Funding”. It can be done by different transactional and hard money lenders. In practicality, there are a number of hard money lenders who do both transactional funding and hard money on the same closings. Unfortunately, their costs are what I consider too high for the transactional funding part of the closings.
As a longtime transactional funder I decided to find hard money lenders who I could trust to close the B – C legs of these deals. Borrowers still have to pass the hard money lenders’ loan criteria to borrow the money but the transactions go much more smoothly from start to finish. Remember the end-buyer is the one who has to qualify for the hard money loan, not the investor wholesaling the property.
I have seen many wholesalers selling their deals by advertising “Funding Available” on their wholesale lists. Obviously, the end-buyers have to qualify for the loans. The hard part of not knowing if a buyer will qualify is shifted to the hard money lender that you are now working with instead of working against. Yes, it seems at times that hard money lenders are working against your best interests as they keep asking for more and more documentation or junk fees.
Dual Funding is a very viable way to increase your wholesale business (you can learn more about dual funding here https://youtu.be/gmtyQ8mGpzU). Before you get a buyer of your deals, make sure the hard money lender is on board for the transactional funding leg of the closing. Ironically many hard money lenders are not transactional funders. The few who do typically have huge Origination Fees, Broker Points, Document Prep Fees and other “Junk Fees”. I recently saw the disclaimer that in small print that said “Broker may charge additional points above the advertised rate” simply in order to increase the lender’s profits on the loans.
In summary, for any real estate funding, check out the actual costs you will be seeing before you get to closing and have more than one lender in place in case your first choice changes the fees or so you are absolutely sure they will do your loan!
To your limitless success,
Real Estate Mentor Program Founder