Private Money Lender · San Diego, CA · Member since 2010 · 2 posts · 0 votes
Hello,
I'm a private lender and I've been approached recently about providing transactional funding for a wholesale deal. I've never done one of these transactions before but have researched them online. I was wondering if I needed any documents (i.e. a contract) between the "B" party and myself or is it all done between the escrow company and myself? What are the crucial escrow instructions to look for? Any tips on how to conduct this type of transaction safely would be greatly appreciated.
In any transactional funding deal you basically want to decide, "Do I want to own this house and resell it for a profit? If that happens, will I recoup my principal in a timely manner and make some money for my trouble?"
In addition to the things mentioned in the thread posted above, here are some of the basics you want to look for:
- a copy of the A-B and B-C contracts.
- a copy of the short sale approval letter, if applicable.
- If it is a back to back closing, Closing Instructions to the escrow agent stating that they won't release the funds on the A-B until the B-C is funded and ready to close. This is the most basic of the provisions that should be in the instructions, but it usually is much more robust than just that.
- a closing protection letter from the escrow agent.
- a Promissory Note between you and the Borrower stating the amount of the loan, the amount of interest you would earn, the amount of points you would earn, the time period within which the note must be repaid, and the remedy for not repaying the note on time.
- you may want to have the Borrower pre-sign a Deed in Lieu of Foreclosure in the event the note isn't re-paid as agreed to in the Promissory Note so you can avoid the foreclosure process.
If you are loaning for longer than one day at the same title company:
- a decent spread - maybe 80% - in the value of the loan you are giving and the current value of the home (NOT the ARV).
- homeowners insurance on the property naming you as additionally insured
- an appraisal that shows the value of the home, completed by a licensed appraiser
- an inspection that shows all the flaws in the home not necessarily revealed by an appraisal
- a statement from the county assessor's office showing the most recent assessed value of the home
- a copy of the HUD1 settlement statement
- a copy of the title work run
The last two items you won't get until closer to closing, but the previous items can help you evaluate if you want to do a deal in the first place.
In any transactional funding deal you basically want to decide, "Do I want to own this house and resell it for a profit? If that happens, will I recoup my principal in a timely manner and make some money for my trouble?"
In addition to the things mentioned in the thread posted above, here are some of the basics you want to look for:
- a copy of the A-B and B-C contracts.
- a copy of the short sale approval letter, if applicable.
- If it is a back to back closing, Closing Instructions to the escrow agent stating that they won't release the funds on the A-B until the B-C is funded and ready to close. This is the most basic of the provisions that should be in the instructions, but it usually is much more robust than just that.
- a closing protection letter from the escrow agent.
- a Promissory Note between you and the Borrower stating the amount of the loan, the amount of interest you would earn, the amount of points you would earn, the time period within which the note must be repaid, and the remedy for not repaying the note on time.
- you may want to have the Borrower pre-sign a Deed in Lieu of Foreclosure in the event the note isn't re-paid as agreed to in the Promissory Note so you can avoid the foreclosure process.
If you are loaning for longer than one day at the same title company:
- a decent spread - maybe 80% - in the value of the loan you are giving and the current value of the home (NOT the ARV).
- homeowners insurance on the property naming you as additionally insured
- an appraisal that shows the value of the home, completed by a licensed appraiser
- an inspection that shows all the flaws in the home not necessarily revealed by an appraisal
- a statement from the county assessor's office showing the most recent assessed value of the home
- a copy of the HUD1 settlement statement
- a copy of the title work run
The last two items you won't get until closer to closing, but the previous items can help you evaluate if you want to do a deal in the first place.
I noticed in the ads of the nationwide TF companies that they prefer (and some require) that the B party be an entity, and not an individual. Why is this important?
Not the case in all 50 states, check with each state's usury laws as they all vary.
On a back to back transaction, you should be quite safe as your escrow instructions specifically state that your funds are not released until the C buyer's funds are in place and ready to close. On a longer term deal, you have much more risk. Even after receiving all the proper documents and such, you are still at risk of having to own the property via foreclosure, deed in lieu, or other. You are also at risk of loan fraud as there are many crooks out there! Be careful and only loan to those who have proven themselves in the past (can shoo documented history).
Good detailed response by Shari. You may want to also include a Mortgage or Deed of Trust (depending on which state you are closing in) as a backup for the B-C transaction not closing. A Deed in Lieu of Foreclosure is a good idea, but most courts will hold that one required at the time of closing will not be enforceable.
I second wills comment on extended term deals being much riskier. They tend to be a hybrid type deal which can be similiar to a hard money transaction. You may want to get a few same-day transactions under your belt before considering extended term transactions.
For instance doing a quick search, it doesn't look like Indiana has any usury limits, so it doesn't matter whether the transactional funding is provided to an individual or business entity? I found this:
"The prevailing interest rate in Indiana, in the absence of actual usury laws, is 10%. Likewise, the interest rate on a civil judgment in Indiana is also set at 10%"
Here's the link where I found the above information:
Max, I think the other paragraph in your link that is relevant is:
"...it is presumed that frequent lending by one individual to another in a manner that involves interest rates well above the prevailing rate might be considered to be part and parcel of an illegal loan sharking scheme in violation of RICO."
In other words, charge more than 10% interest at your own risk.
Also, I note that the copyright date at the bottom of the web page you reference is 2008, so if this matter is of concern to you, you might want to find out if Indiana now has a usury law.