This question came in the other day so I wanted to cover it. If you are trying to buy wholesale property or sell a wholesale property and the purchase price is coming from a conventional lender how does that work? A conventional lender is not going to be happy with a wholesale deal. They don't recognize the assignment of contract because they want the seller of record and borrower to be on the same contract.
In an assignment for instance, if you are the wholesaler, you're the one that is actually on contract with the seller and what you are doing is assigning your rights to a buyer. A conventional lender doesn't recognize that. They will also not finance in a wholesale fee. Let's say you are the buyer and you want to purchase a wholesale property and you go to a conventional lender. The lender won't recognize the contract and won't finance the assignment fee. So what can you do? You have to get around it legally.
Let's do this from an example that you are the wholesaler. I think that will be the easiest way to walk through this deal. Let's assume that you are the wholesaler. And you've got a property under contract with a seller and it is a great deal. The first thing you want to do is filie an affidavit, memorandum of purchase and sale agreement. It's a one page document that you sign and you have your signature notarized that says that you are affirming that you do have a valid purchase and sales agreement on the property and that you are ready, willing and able to close.
Anyone else should beware and not take any action on that house because you have this valid purchase and sales agreement. Take that to the county records department wherever legal notices are filed on properties and have that paper filed. It will cost you $10 or $15. What it basically does is put a cloud on the title and stops anybody else from being able to purchase the property without first getting it released from you. It's a great way to protect your wholesale deal in the first place.
Let's put it to work in this situation, your buyer comes to you and the only kind of purchase loan they can get is from a conventional lender. Normally you'd just have to walk away from this because there is no way they could do it. There is a way to structure this deal so they could get the loan on the property. Remember the bank is requiring that the seller of record, which is your current seller, and the borrower, which is your investor buyer are together on the same purchase and sales agreement. What you are going to do is go back and write up a brand new purchase and sales agreement between your seller and your buyer at the new price. Let's say you purchased the property at $150,000 you're going to make $10,000 on it so the new price is $160,000. You'll explain to your seller that you are partnering up with somebody and that you are going to use that extra money to do repairs necessary on the property. Get them to write up the new contract between the seller and the buyer at $160,000.
Your conventional lender's requirement is now taken care of. The seller of record and the borrower are on the same purchase and sales agreement. But that left you out of the deal correct? Well down in the stipulations section you'll write down that the seller is going to pay you or whatever entity you are in a fee of $10,000 to release your interest in the property. They are going to pay you $10,000, that's your deal. Some may ask that now that the buyer and seller know each other, couldn't they go behind my back and draw up a brand new deal all together? Well, yes they could but don't forget that you really have a valid interest in the property.
Remember that affidavit that you filed that is a cloud on file. If they try and go behind your back you can stop it because they have to get your release in order to do the deal. You are still in control. The lender then is going to approve the loan. And then go to closing and the house will sell now for $160,000. The seller is going to pay you $10,000.
Is there anything illegal? Here is what attorneys have told me in the past. The test as to whether it was legal or not:
- Was it all fully disclosed to the bank?
- Did the transaction, as it occurred in reality, accurately be documented in the paperwork?
- Did we disclose everything to the lender?
Yes, we disclosed that the buyer was going to buy the property at $160,000 from the seller and that the seller was going to pay us $10,000 to release our interest in the property. The buyer did buy the property from the seller for $160,000 and the seller really did pay us $10,000 to release our interests. Did we have a bonafied interest? Yes we did. When the closing agent does a title search they will find our interest in the property which was the affidavit. All of it was legal. What we disclosed in the transaction and the paperwork was representing exactly the way the transaction occurred in reality. There was no bank fraud in there.
That is what everybody is concerned about. Well the bank knew everything and they will approve of the seller paying you. There is no problem with that even if they don't like it when the borrower gets money back. You are a third party to this transaction and they are going to see that and are going to be very happy with letting you get your assignment fee out of the deal. As long as you are not calling it an assignment fee but a fee to release your interest in the property. That's the easiest way to set a wholesale purchase up so that a conventional lender will work with you.