This article is of interest to wholesalers and to cash buyer investors buying from wholesalers.
In a typical wholesale deal, a wholesaler signs a purchase agreement with the seller with a certain purchase price, then assigns the contract to an investor-buyer who pays a higher purchase price. The wholesaler makes money on the difference in the two purchase prices, as an assignment fee.
There are a variety of scenarios in which a contract to purchase a property is not easily assignable from the wholesaler to the investor-buyer. In some of those cases, the deal is consummated by doing a “double closing.” In a double closing, the wholesaler actually buys the property from the seller, then turns around and very quickly sells the property to the investor-buyer, usually within minutes or hours, sometimes up to a couple of days.
In this article, the term “wholesaler” will refer (somewhat inaccurately) to the buyer in the first buying transaction of two transactions of a double closing.
There are several challenges for the wholesaler in doing deals through double closing that include higher costs, especially duplication of costs such as realty transfer tax, title insurance, settlement fees and more.
Usually, the very major barrier for many wholesalers to do a double closing is the lack of funds to buy the property for the first step. In fact, many newbie wholesalers are lured into wholesaling by gurus who proclaim “if you don’t have cash and don’t have credit, wholesaling is for you!” For those newbies who buy into that oversimplified hype (most of whom will fail for 6 major reasons – see video training at https://vimeo.com/ondemand/smarterinvesting/230708120), they don’t have the funds to buy the property in the first step of the double closing.
So, if a wholesaler has a great deal that he/she does not want to pass on, but faces the two problems of having to do a double closing AND not having the money to purchase the property for a few minutes or hours, how can the wholesaler make money and not walk away from the great deal?
One answer is “flash funding” which is temporary funding to buy the property for those few minutes or hours. In a flash funding scenario, the wholesaler borrows very short term funds to buy the property and pay the closing costs, then pays back the loan a few minutes or hours later when the property s sold to the investor-buyer.
There are companies that provide “transactional funding” for such deals. You can search for transactional funding lenders in your area. One of them advertises their service as “dough for a day” and they charge 1.75% of the amount funded as the fee to use their funds.
If you are a wholesaler who found a great deal and if your investor-buyer is a TRUE cash buyer with their own cash (not borrowed from a third party), then you may be able to get your flash funding from your cash buyer in return for a discount on the assignment fee.
I once bought a property from a wholesaler using flash funding in a double closing. I will illustrate the concept of the deal below. Before explaining that, I want to point out that if the deal with the wholesaler was not a double closing, I would have written that I bought the contract from the wholesaler, not bought the property. There are legal ramifications to these words and if you don’t understand the difference, you need to learn more about wholesaling before engaging in these activities.
The following example illustrates how a flash funding deal might work between a wholesaler who found a good deal and has a true cash buyer.
Let’s say that a wholesaler (who has almost no money) finds a motivated seller of a distressed property that needs $30k in repairs, has an ARV (after repair value) of $150k and can get it under contract at a purchase price of $65k. Let’s also say that the wholesaler would need $70k of cash to buy the property after accounting for all buying costs (such as title work). We will assume that there is some valid reason or restriction that requires a double closing and that the wholesaler has a cash investor on his/her buyer’s list who is willing to pay $80k for the property with unencumbered money (cash).
In theory, there is about $10k of profit for the wholesaler in this deal and about $30k in profit for the investor-flipper who is a true cash buyer after buying costs, holding costs and selling costs.
In this scenario, the investor-buyer could provide the $70k in cash to flash fund the purchase of the property by the wholesaler. The money would be wired from the investor-buyer’s account to the title company (NOT to the wholesaler!) together with appropriate mortgage, note and other documentation provided by the investor-buyer’s attorney to secure and protect the $70k.
The wholesaler and the investor-buyer would reach an agreement for the cost of the flash funding, for example, a reduction of the purchase price by $1.5k from $80k to $78.5k. In the end, the wholesaler would make $8.5k and not need any cash.
It is important to understand the full details of each individual deal and make sure that there are no special restrictions and the investor-buyer is protected.
For example, if the wholesaler is buying the property at auction, everyone must read all the addenda to make sure that there is no restriction on reselling the property within 30 days.
Another example is that the title insurance bought by the wholesaler to execute the first purchase must contain an endorsement that enables that insurance to be transferred to the investor-buyer. If that does not happen, then the investor-buyer might be left without any title insurance the moment the second closing is executed.
Yet another scenario is to make sure that hazard insurance is in place.
There are MANY moving parts with all loans, especially those secured by real estate, so it is essential that you engage an attorney experienced in these matters to draw up the documentation. If you are the investor-buyer, then you should use your attorney’s documents, not the wholesaler’s documents. Flash funding as described here is a form of private lending. Watch the video on 19 things that can go wrong with private lending and suggestions how to avoid them in our training video at https://vimeo.com/ondemand/smarterinvesting/230708406.
Where there is a will, there is a way. If you have a good wholesale deal that for one reason or another is best executed by a double closing, flash funding may be a method you should consider. Engage an attorney to make sure it is done right.