Conventional Lending As A Real Estate Investor's Tool For Wholesale

Conventional Lending As A Real Estate Investor's Tool For Wholesale Deals

I have been asked many times by real estate investors about the use of conventional financing for investor deals. These individuals hope to secure a bank loan or similar type of loan to purchase the property from me, or from another wholesaler. There are advantages to this including the fact that loan origination fees are lower and rates are cheaper. Hard money loans are more expensive, these are loans coming from individuals and they usually charge 5 points and 15 percent interest on up. Before you decide to go this route, you should consider the process and if this is the best route for your needs.

One of the first considerations should be is if this type of loan is obtainable, since only properties in good condition can receive a conventional mortgage loan. Secondly, you need to consider the deal's structure. I've never found a conventional lender who is willing to hand over a mortgage loan if there is an assignment fee involved in the transaction. This means that a wholesaler involved would be unable to get paid and of course this means they will not sell the property through conventional loans. The borrower must be the buyer named on the agreement. They will not fund the assignment fee.

There are a couple of ways to get around this.

#1: One way is if the wholesaler rewrites the agreement. This time, the new borrower is the buyer. When this happens, all issues with paperwork are resolved. In this scenario, the buyer must fund the assignment fee with some type of funds. In this situation the wholesaler is left unprotected because nothing demonstrates the wholesaler's right to neither purchase; nor the assignment fee to be paid. To get around this, a special agreement needs to be forged; which of course makes the process complicated. It is important to note that even if you have a seller willing to do this, you cannot just list the inflated price on the agreement and add a stipulation that the assignment fee is to be paid to the wholesaler. This cannot happen because the wholesaler's fees then show on the seller's area of the contract with the implication that the wholesaler actually acted as the real estate agent. If they are not an agent, it may not work.

#2: The second situation involves the wholesaler becoming the owner and in the chain of title. At this point, he can write the agreement with the buyer at the property's full price which also includes the assignment fee. To make this happen, you need a seller willing to do it and one who is using short term seller financing, a short term bridge loan from private lender, a home equity loan, or they are using a subject to financing option. The loan to value ratio must fit the requirements for it. This means banks will loan on the price and fund the assignment fee.

#3: A final option is the use of a land trust. Of course, these are highly complex. Yet lenders see land trusts often and are familiar with them and most will work with them without a problem. If this is the situation you will take on, you need an attorney who is familiar with them. It can be hard to find one that believes in them, either. With land trusts, locate a seller willing to sign a letter of direction. This allows the wholesaler to be paid a fee. Then, the seller and buyer can deal with each other.

There is more to keep in mind with conventional financing. It is a slow process. Mortgage brokers may allude to the loans being able to close in 10 to 14 days, but this is only true so far as getting the loan to the lender within a short amount of time. There is a rush on refinancing and lender's underwriters are slowed by it. It can take a week or longer. Conventional loans also require conditions to be met and submitted to the underwriters for approval. If conditions exist, this could take even longer for the loan to work its way through. Give at least three weeks to a month for the loan to close. For deals without this amount of time, consider other financing options.

There are some times when conventional financing works. It does not work in all situations. You should understand the process and what hurts or pushes the deal through. For the most part, conventional loans are not the best option for real estate in this form. Time, complexity and the process gives you stress; stress you do not need to deal with.

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