Much has changed in the ability of investors to complete short sales and REO (Real Estate Owned) purchases when funding is needed to complete the buy side of the transition. The homeowner/seller or asset manager/seller wants to cash out of the property and move on his way. The purchasing investor wants to buy the property but not use any of his own money to do it -the dilemma becomes can an investor make money without having any money?
This transaction is called an "A" to "B" sale when the seller ("A") sells the property to the investor ("B"). However, there is no profit in just buying properties, only when they are re-sold as quickly as possible for a profit. I understand that some investors buy to rent but the return of their money requires a long time to get back. The average investor can't make a living getting an extra $500/month income by investing $70,000 at a time.
So the "B" investor-owner of the property must re-sell the property to another buyer, here designated as "C". The transaction will end up looking like A sells to B who sells to C and all in the time frame of a couple of hours in one day. The investor (B) will hopefully walk away with a profit and A will be out of his headache property and C will be the new owner of the property. Literally, this transaction has been done for hundreds of years.
However, in the past few years, the lending institutions have made catastrophic business decisions such as their sub-prime lending debacle, targets of mortgage fraud, and to make things worse - a severely declining real estate market. So now many of the usual and customary transactions that investors used for years have come under scrutiny and are no longer allowed, sometimes by state and federal law, but most often by policy changes at the lenders.
Transactional funding of a closing for a few hours, or simply putting up the money for the A to B leg of the closing transaction, has become very common when it is necessary to overcome the problem of the B to C leg being funded by a conventional lender. Conventional lenders are banks, FHA (Federal Housing Administration, FNMA, and Freddie Mac as examples. Lenders don't like using their money so real estate investors can make a profit on the "flipping" of a property. The funding of the closing between B and C by using the lender's money to fund the purchase from the original seller has been deemed to be illegal and is being prosecuted nationwide.
The solution is to use the transactional funder's money to buy the property and re-sell it to the end buyer. The investor now has money in the deal and so avoids the no-money illegal nature of the transaction when he re-sells to the end-buyer to get his profit. The cost to borrow the transactional funder's money for a few hours is usually two percent (2%) of the gross amount borrowed plus fees. For a $100,000 loan, these costs could be $3,000. If the investor's potential profit in the transaction is large enough, it's a good deal, if not large enough, he can't close the transaction.
If the end buyer is a cash buyer, some closing agent will still require the investor-buyer to have money in the escrow account to close. But it generally is not illegal to use a cash buyer's fund to close the A to B leg of the transaction. If the closing agent tells you it is, ask him why if you are going to do a double or simultaneous closing. It is probably more likely a policy decision on his part or his title insurance company.
Before you get all the way to the closing table and can't close, consider this alternative to buying the property. Instead of putting the property in your name or an entity's name, put it in a land trust - and designate this buyer on the original Purchase Contract. Have your end buyer come to the closing and bring a cashier's check for the amount due on the HUD-1 Statement and another check for your profit. At the closing, use his money to buy the property in the land trust and you immediately transfer the land trust to the end buyer by transferring the trust's Beneficial Interest to him and immediately resigning as Trustee.
There are other "Last Minute" transfers at the closing table such as a Quit Claim Deed or Limited Warranty Deed but these will require additional costs. In any of these cases the end buyer must be in the informational loop and understand the entire transaction before the closing. One last hint, get additional title insurance for the actual purchase price the end buyer pays for the property in case of a title issue later. Your closing agent should gladly cooperate since he gets 70% to 80% of the title insurance fee as a commission.
