Transactional Funding and Short Sale Flips

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Transactional Funding and Short Sale Flips

Tom Kitas
Real Estate Investor · Boca Raton, FL · Member since 2010 · 12 posts · 11 votes

Hello everyone I am very new to this forum. I have read a lot of the different threads and find the people on here very knowledgeable and helpful. Now I hope someone can answer a question for me. I have been in real estate for many years and understand the fundamentals. What I am having a hard time with is this new transactional funding short sales. I understand in theory how it works. You find a distressed property in which you make a low offer on. If the offer for the property is accepted then you line up a C buyer that buys it from you for a spread. You arrange for a double closing and I would use transactional money to close my deal and then do a closing with the C buyer as me being the seller. There you would get a check for the difference between transactions minus any fees. All of this has to be transparent and cannot be hidden from anyone involved in all transactions. This is my complete understanding of this theory. My problem is in practical use of this theory.
A year ago banks had no clue what was going on and these short sale transactional funding deals were happening all the time. Now banks have gotten more wise and are on to these deals. My question is how is anyone getting them done? Short sales are a long process in and of itself. Now you are telling the bank that you as the buyer are an investor and have someone else lined up to buy the property after you buy it for a profit. An example would be is you find a house in which you can buy on a short sale for $150,000. The original mortgage from seller A is $250,000. You then find a C buyer that is willing to pay $200,000. How does anyone get the bank to approve this from the prospective of the A seller? Would not A bank who is taking the loss in the short sale just say that if there is a buyer that is willing to pay $200,000 as opposed to $150,000 then the short sale amount they will take would be $200,000 instead of just the $150,000 effectively wiping out your original deal? Also it is my understanding that a lot of banks are putting language in their contracts that state you as the buyer cannot resale the property anywhere from 1 to 6 months. How does anyone get around that. Then there is also the other problem where banks for the C buyer are now looking at the chain of custody on title for the last 12 months. If there are any breaks such as what this would cause, then they are not funding the C transaction and your deal goes down the drain anyway. How would I get around all this legally?

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Eric M.
Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes
16y

Tom,

You have a good handle on the process but it seems to me that you have a lot of analysis paralysis. You are over-focusing on the obstacles you will face instead of just doing it.
No doubt they are obstacles and if you aren't prepared to perservere and overcome them, you shouldn't be going into short sales.
All the things you fear, can be and are issues. You simply keep going and overcome them. They ruin some deals but you keep looking. Not all lenders have a waiting period, so you work with the ones who don't. Some C lenders are very flip friendly so you work with them.
Don't focus on the ones who aren't, just avoid them or find a new area to invest.

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  • Scott Hubbard
    Rehabber · Tucson, AZ · Member since 2008 · 1k+ posts · 802 votes
    16y

    With all due respect, all your questions have been discussed thoroughly in this forum and I suggest you read through the great wealth of information herein.

    Fact is, there are no easy answers to your questions and if there were everyone would be doing it. There are some things to consider before making an offer on an SS property.

    1. You need to have a team of people and firms at your disposal to help you through th process. Real Estate is not an individual sport and this is especially true with short sales.

    2. Screen your leads. Find out as much information about the circumstances of the seller. Success will depend largely on which lender your dealing as well as the investor who hold the mortgage investment. Avoid lenders who have flip restrictions.

    3. Go FSBO. The basic premise to a bank accepting a short payoff at a discount is that the NET proceeds will be higher than as a REO. In essence, your mitigating the lenders cost and risks. If your paying 6% commissions on the A to B transaction, you effectively reduced your margins.

    Short sales do work but having a $50K payday is rare. Mostly it is about volume so having support is key.

    Good Luck

    1Reply
  • Richard Graham
    Real Estate Investor · Outer Banks, NC · Member since 2009 · 121 posts · 44 votes
    16y

    Define "Rare" ;)

    0Reply
  • Eric M.
    Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes
    16y

    Tom,

    You have a good handle on the process but it seems to me that you have a lot of analysis paralysis. You are over-focusing on the obstacles you will face instead of just doing it.
    No doubt they are obstacles and if you aren't prepared to perservere and overcome them, you shouldn't be going into short sales.
    All the things you fear, can be and are issues. You simply keep going and overcome them. They ruin some deals but you keep looking. Not all lenders have a waiting period, so you work with the ones who don't. Some C lenders are very flip friendly so you work with them.
    Don't focus on the ones who aren't, just avoid them or find a new area to invest.

    2Reply
  • Tom Kitas
    OP
    Real Estate Investor · Boca Raton, FL · Member since 2010 · 12 posts · 11 votes
    16y

    Eric I want to thank you. You are right I am very over analytical. I was not always this way. I use to jump right into to something with both feet and learn as I go. My experiences doing that sort of thing has not been good and therefore here I am. Since I fell flat on my face one too many times and now it just plain hurts from all the falls I make sure I know everything there is to know prior to getting into anything that could potentially back fire on me. The only real risk I see in this so far is that you can end up with a property that you have no end buyer for which then would cause you to find a hard money lender and some cash out of pocket, neither of which I want to get involved with. The only reason I do not want to get involved in something like that is because I have been down that road already and when one mistake happens it is usually followed by a snowball of others that can wipe out all your savings. Not saying it will I am only speaking from my experience. In my experience it did. I jumped into something only knowing the basics and relied upon the on the job training to do the rest. That was a big mistake for me. Now I do all the learning before I jump into the lake, therefore I have enough knowledge from the veterans who have been there to know some of what may go wrong and how best to deal with it without getting myself drowned in the process. The only other pitfall I have found so far is after spending a lot of time on a deal you think is going to happen and have your C buyer lined up, the bank throws a monkey wrench into the whole deal and it falls apart and into the toilet. That is the price of doing this kind of business and I can deal with that. I just want to make sure there are no other problems that I should be aware of that could give me personally a lot of problems or hurt me financially. I am not saying that once I get into this field of short sales transactional funding that I will not encounter something unusual that may cause me financial problems personally. I am just trying to minimize the risk by learning everything I can first. This is why I am asking for help in the form of personal experience sharing. I thank you and anyone else who will contribute to my learning process as so I can avoid the most common mistakes and try to keep my wealth intact by preventing rookie mistakes from happening. Anyone who has any knowledge that they want to share about this whole process, I want you to know that I really appreciate it and I thank you.
    Scott there are threads in this forum all over the place about this topic in some form or another. I have read them but I am wanting the most up to date information as this industry is changing constantly and what worked just a year ago may not work now. This is why I started this new thread to be able to get more up to date information on the process. You mention having a team in place but there is one very important thing you forgot to mention. You are only as good as the team you lead. You can only lead your team with the knowledge you have. If you do not have up to date knowledge then you will not be successful. My goal is to do this right, keep it legal and lead my team I put together in the right direction for the success of all. A quote comes to mind that can apply more towards this business then any other I can think of off the top of my head. "It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change."Thank you for your input as all information I get is helpful.

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  • Eric M.
    Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes
    16y

    I see where you are coming from but I am not recommending jumping off a cliff here. You have plenty of knowledge to begin.

    What you view as your potential risk (ending up stuck with a home you can't sell and forced to take HM) is not really accurate.

    If you are trying to organize same day back to back closings, you will not get "stuck" with the property.

    The transactional lender wants to guarantee his money so he will inform the Title Agent not to disburse funds from the A-B closing if the B-C closing does not take place the same day.
    So if the B-C falls apart at the last minute (happens often), the A-B is simply unraveled and you don't buy the property.

    Worst that happens is you lose your Earnest Money and maybe some closing service costs and a bit of your reputation with that Loss Mitigator. So it is not the end of the world.

    Of course, you have lost your time too, and that will happen alot. You will sink alot of time into deals that don't close. But the ones that do close should be nicely profitable.

    It is up to you to decide if the payoff is worth it.

    Some think it is, some think it isn't.

    1Reply
  • Scott Hubbard
    Rehabber · Tucson, AZ · Member since 2008 · 1k+ posts · 802 votes
    16y
    Originally posted by Richard Graham:
    Define "Rare" ;)


    So to clarify:

    With the national median home price around $150K, that would mean a $50K payday would be 33% in profits after expenses. So, in my opinion, this is an unusually high profit margin for this price target.

    On the otherhand, if your market is dominated by $500K homes, then $50K may not be such a lofty goal.
    0Reply
  • Scott Hubbard
    Rehabber · Tucson, AZ · Member since 2008 · 1k+ posts · 802 votes
    16y
    Originally posted by Tom Kitas:
    A year ago banks had no clue what was going on and these short sale transactional funding deals were happening all the time. Now banks have gotten more wise and are on to these deals. My question is how is anyone getting them done?

    It is true short sales have evolved over the years. It used to be you could walk into your local bank and deal wih the loan originator to purchase the property. All you needed was a contract and a cooperative seller. The costs to foreclose were so high relative to property values that you easily could walk away with a great deal.

    Now with the effective commoditization of mortgages, the streamlining of foreclosure proceedings, and the competitive rates offered by law firms, it is less expensive for banks to foreclose these days. The margins are simply much thinner and you can no longer just rely on loss mitigation (savings vs. costs) for your justifications.

    The truth is banks do not want the product, but the supply and demand remains askew and as long as it does, short sales are necessary evil for lenders.

    Originally posted by Tom Kitas:
    How does anyone get the bank to approve this from the prospective of the A seller? Would not A bank who is taking the loss in the short sale just say that if there is a buyer that is willing to pay $200,000 as opposed to $150,000 then the short sale amount they will take would be $200,000 instead of just the $150,000 effectively wiping out your original deal?

    Most lenders do not want multiple offers and when you are under contract A to C, you or the seller are under no obligation to present a higher offer. I put into my contracts the disclosure that no other offers will be presented. If the lender wants me to strike this verbiage or wants to know if this is the highest and best offer, then you should disclose that fact.

    Originally posted by Tom Kitas:
    Also it is my understanding that a lot of banks are putting language in their contracts that state you as the buyer cannot resale the property anywhere from 1 to 6 months. How does anyone get around that.

    If you are concerned about this issue, here are some options.

    1. Avoid lenders/investors whom notoriously put restrictions in their approvals.

    2. Avoid the HAFA program.

    3. Use private capital or your own money to close and hold for the restrictive period. For instance, if the property needs repairs, partner with a rehabber on the deal using his/her money. Personally I do this and it works well.

    4. Use seperate title companies on the A to B and B to C. Although you should CYA on this before attempting. You will also need a cooperative transactional lender who has the ability and confidence to utilize two seperate title companies. This option is best utilized with your own funds or at least access to private capital.

    5. Hire an attorney and have them remove the restrictions. Although this has become less and less effective, it is still possible to accomplish the removal of any restrictive language.

    6. Joint venture with a transaction lender. There are lenders who will finance the hold periods.

    Originally posted by Tom Kitas:
    Then there is also the other problem where banks for the C buyer are now looking at the chain of custody on title for the last 12 months. If there are any breaks such as what this would cause, then they are not funding the C transaction and your deal goes down the drain anyway. How would I get around all this legally?


    Read this thread thoroughly: http://www.biggerpockets.com/forums/103/topics/52801-lets-creat-the-bp-list-of-flip-friendly-lenders-

    Basically you need to know which lenders in your market do not sell their loans to the secondary market. Credit unions and local/state banks are likely your best source of whether or not they can finance this type of transaction. I spent hundreds of hours talking to lenders so do not waste your time with the sales person you need to talk to an underwriter.

    You need also to be able to massage these deals through the due diligence periods. Being able to sit down with a local contact and look them in the eye can make the difference. Once you have a deal or two under your belt, you suddenly will see doors opening you thought were closed.

    In conclusion, you have a very good grasp of the process now you need to form a team that can help YOU help yourself. You do not need to be an expert, but you will need experts nonetheless.

    [i]In actual life every great enterprise begins with and takes its first forward step in faith.

    -Friedrich Schlegel
    [/i]

    Good Luck!

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  • Tom Kitas
    OP
    Real Estate Investor · Boca Raton, FL · Member since 2010 · 12 posts · 11 votes
    16y

    I want to thank both Eric and Scott for there support by sharing their knowledge. You have put a lot of my question to rest so that I can feel much more comfortable to get a couple of these deals under my belt. You gave me the insight I need before I get into this and now I can with some confidence.
    The example I used was an easy total hypothetical and not real in any way. I do know that if you can get a 20% spread on your deal you are doing good. Anymore and you have your work cut out for you. Scott joint venturing with transactional funders and also partnering with rehabbers are both great ideas I never would have thought of. You have gave me more alternatives for additional exit strategies in case one flies south on me.
    Thank you again and if anyone else would like to add comments to help in my knowledge I thank you in advance and appreciate all help I can get.

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  • Nick Reuter
    Real Estate Investor · Bradenton, FL · Member since 2009 · 99 posts · 42 votes
    15y

    Good luck Tom. Volume is important so build that pipeline and as you get going build a process that you can replicate so you aren't always reinventing the wheel with each new deal. Remember to keep your contacts as you work since you will end up working with the same people over and over again and stay organized.

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