When do you use hard money in wholesaling?

10 Replies

Hello,

Newbie question here, would really like to hear your answers, thanks in advanced.

I found a home through a referral. The home is in complete shambles (no plumbing, no electrical, water damage etc.) about $150K in repairs are needed.

The home is in a great location and would sell for a large profit if fixed up. 

I have made contact with the owner and we agreed on a price of $200K. I put a purchase agreement in place with $500 in earnest money. The seller is wanting $3,000 in earnest and 30 days. The seller will not move on this.

I was looking for advice on taking out a HML for $200K, purchasing the home and then selling the contractual rights for $230-$240K. If anyone has insight on this I would love to know your thoughts.

Thank you,

Brian Sigmon

assign the contract right now for $230k and walk away. no need to get a loan at all.

@TroyGravett

Could you expand please, thank you for your response.

Thank you

Brian Sigmon as @Troy Gravett mentioned do a quick search on BP about wholesaling and you will get a lot of great information,
However if you want to buy the property for 200K with HML and sell it for 230K now assuming the HML is Asking for 10% plus points and closing costs I’m not sure where your profit is.

@brian sigmon There are a couple of things to consider here. First, if you're buying the place for $200k and not going to put any rehab into it yourself, you will likely be looking at a $150k loan and bringing $50k to the table (75% LTV). Second, if you purchased it with hard money, there would be no contractual rights to convey. You would own the property and would convey title to it. Plenty of wholesalers do it this way - they close on the property and spend a few hundred bucks cleaning it out and then they can have as many people inspect the house as they want without the seller objecting, etc. However, you would then be selling your house, so there would be two sets of closing costs involved and you would have to figure out who all is paying them (the seller, you, the buyer, or a combination). Third, it sounds like you made an offer that wasn't accepted by the seller, so I doubt you have anything to convey at this point, since you said the seller insists on $3,000 in EMD. You could put that on the line and try and assign the contract, but the seller is apparently (and smartly) keen to what you are up to. That would be your risk to take. Finally, I'm assuming this is your first hard money loan, so you'll probably pay 3+ points ($4,500) and fees ($1,500+) and at least a month's worth of interest ($1,500+). I would ask myself if I could get much more than an extra $7,500 in profit by closing on it myself and then reselling it, and if not, it makes sense to get it under contract and assign.

You would use hard money when you want to do a double close (that is not simultaneous) so that the investor doesn't know how much you're making on the wholesale. Other than that, I don't know why you'd want to bring in a HML. Transactional funding is usually a bit cheaper than standard hard money rates.
Originally posted by @Jason Hirko :

@brian sigmon There are a couple of things to consider here. First, if you're buying the place for $200k and not going to put any rehab into it yourself, you will likely be looking at a $150k loan and bringing $50k to the table (75% LTV). Second, if you purchased it with hard money, there would be no contractual rights to convey. You would own the property and would convey title to it. Plenty of wholesalers do it this way - they close on the property and spend a few hundred bucks cleaning it out and then they can have as many people inspect the house as they want without the seller objecting, etc. However, you would then be selling your house, so there would be two sets of closing costs involved and you would have to figure out who all is paying them (the seller, you, the buyer, or a combination). Third, it sounds like you made an offer that wasn't accepted by the seller, so I doubt you have anything to convey at this point, since you said the seller insists on $3,000 in EMD. You could put that on the line and try and assign the contract, but the seller is apparently (and smartly) keen to what you are up to. That would be your risk to take. Finally, I'm assuming this is your first hard money loan, so you'll probably pay 3+ points ($4,500) and fees ($1,500+) and at least a month's worth of interest ($1,500+). I would ask myself if I could get much more than an extra $7,500 in profit by closing on it myself and then reselling it, and if not, it makes sense to get it under contract and assign.

 Jason, 

Thank you very much for your response. 

Originally posted by @Nghi Le :
You would use hard money when you want to do a double close (that is not simultaneous) so that the investor doesn't know how much you're making on the wholesale.

Other than that, I don't know why you'd want to bring in a HML.

Transactional funding is usually a bit cheaper than standard hard money rates.

 Nghi,

Thank you for your quick response. I will begin to look into transactional funding, after just a brief search most transactional lenders want the B+C side to close on the  property same day. I will need a bit longer to market property to my buyers maybe 30 days. Do you know any transactional lenders that will agree to these terms?

Thank you,

Brian

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Brian Sigmon once you have a signed contract between you and the seller, you can assign aka ‘wholesale’ that contract for a fee. You basically assign your rights to somebody else (investor) and they perform on the contract you negotiated. You do not need to get a loan or even buy the property, you are just selling the contract.

Originally posted by @Troy Gravett :

Brian Sigmon once you have a signed contract between you and the seller, you can assign aka ‘wholesale’ that contract for a fee. You basically assign your rights to somebody else (investor) and they perform on the contract you negotiated. You do not need to get a loan or even buy the property, you are just selling the contract.

This works pretty well in most places, but not all markets are so friendly to wholesalers.  I think I saw a BP post where a wholesaler got into legal trouble in Ohio for, well, wholesaling.  There's always those conversations about the legality of wholesaling, whether or not you need a license, etc.  Double closings are a way around that because you actually are the seller of the property (for a brief moment).  Again, I don't know if the OP's market is a place is you have to do this, but double-closes should always be a tool in a wholesaler's back pocket anyway, especially for situations where you're making a lot of money and don't want the end buyer to know how much you're making (because the assignment contract will show that).

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