Title Company Rules Change Procedures for Short Sale and REO Investors

The difference between wet funding and dry funding a double close can mean the difference between success and failure for your wholesale flip profits to be earned.  Dry funding risks the deal, wet funding is safer and more readily accepted by title companies.

• Wet Funding means that the investor arranges for a short-term loan to fund “Side A” purchase of a property.
• Dry Funding is when the investor arranges to use another buyer’s money to fund the purchase.
• In either case the contracts are held in escrow at a single title company.
• The investor does not need any funds or credit in either case.

Title Companies Prohibit Dry Funding

Before wide spread rule changes in response to our current mortgage crisis, it was common for investors to arrange to use the purchase money from the end buyer to pass through to his or her purchase and keep a profit margin in the middle.  This was known as dry funding because the investor did not fund the purchase.  Increased legal scrutiny means most title companies will not accept dry funding closings anymore.  Smart real estate investors are adapting to these new rules by using Transactional Funding.

Wet Funding Allowed by Title Companies

Today, investors using short-term loans to bridge the gap and close the Side A to B purchase.  The term for these short term loans is Transactional Funding, Flash Cash, or Short Bridge loans.  The title officer distributes the loan funds to the (previous) owner and then delivers the deed to the investor. Next, the title company closed the B to C Side of the transaction, delivers deed to end buyer from investor, and repays the bridge loan. This is called a Back to Back Closing.  Lastly (but most importantly!) the investor receives the profit proceeds from the title company and a complete set of closing documents from each transaction.

This blog (weblog) is for real estate investors, agents and brokers interested in Flipping Houses and Commercial Properties. Here you will find:

• How-to instructional articles, videos and information about private funding for real estate flip transactions
• News and information about industry regulations, business practices and private lender financing trends

Two Ways to Fund Wholesale Flips, REO or Short Sale

Here are two common ways that real estate investors use to finance house flip transactions without using any of their own cash or credit. These strategies are used by wholesalers who are flipping short sales, pre-foreclosure or REO properties.

• Simultaneous Closing Using B-to-C Buyer’s Lender Funds
  
• Back-to-Back Closing using Transactional Funding Loan

Both these types of flip transactions have the same initial requirements, which are Side A to B, and B-to-C side contracts secured by the investor. When the contracts are executed, the investor places them both in escrow at a single title company or closing attorney. The difference between the two types is how the Side A to B transaction is funded.

In a simultaneous closing, the the end-buyers lender funds the B to C contract closing first. The side A to B side is waiting to close immediately afterward, and then the funds are disbursed to Seller and profits to the investor. The order of recordation of the title deed is orchestrated by the title company so there are no title defects. It is called simultaneous, but for all practical purposes, the investor has sold the property before he or she closes on the purchase. This procedure was widely accepted by title companies for many years, but is now rarely allowed.

A back-to-back closing is similar in process, but with one major difference. In a back-to-back closing, the investor funds Side A-to-B transaction, separately from the end-buyers financing or cash. He or she closes the purchase of the property before selling it to the end user and does not use the end buyer’s funds.

Title Company Closing Rules Change

Because of increased industry scrutiny and the many changes in title company internal regulations, investors are being forced to fund their side of the transaction using a back-to-back closing and transactional loan.  These types of loans are often called “Flash Cash” because they are paid back very quickly.

Also, there has a bit of change in the terminology. A simultaneous closing has historically been known as a seller financing technique, where the private mortgage note created by the seller is sold to a note buyer upon closing. The term simultaneous closing has been expanded in recent years to include flipping the deed to a property as well as the note.

In conclusion, a simultaneous closing means that the investor uses the buyer’s money to purchase the property and then resell the deed without funding his or her purchase. In a back-to-back closing, both sides are funded separately.

Transactional funding loans (“Flash Cash”) are a new lending product and procedure to the residential real estate industry, most commonly used in short sale or flip transactions. The product is born from increased scrutiny and regulation in our business, and the refusal of most title companies to perform simultaneous closings.

These new title company and lender rules are having a big impact on pre-foreclosure real estate investors and agents who negotiate short sale transactions. Double closing flip transactions using the end-buyers money to fund the initial purchase of the property is rarely allowed, even by small “investor friendly” title companies.

Today, in most cases, investors must fund their purchase contract and separate the two transactions – Side A to B closing and then Side B to C closing. This procedure is called a “Back-to-Back Closing.”

For many investors, financing this new type of double closing, the solution to this is Transactional Funding, sometimes called “Flash Cash.” Here is how it works, step-by-step:

1. Investor – (B) – executes contract to purchase property from Current Owner – (A).
2. Investor – (B) – contracts to sell property to end-user – (C).
3. Investor submits both buy and sale contracts to title and escrow company.
4. The Transactional Funding Lender – (S) – commits to fund the Side A to Side B Closing.
5. The End Buyers Lender – (L) – commits to fund the Side B to Side C Closing.
6. The Title Closer arranges to close between the Seller and Investor, and then closes between the investor and the end buyer.
7. When both transactions have closed, the deed is passed to the end buyer in trust with Buyer’s Lender.
8. Title company distributes proceeds to the Current Owner
9. Title company pays back the investor’s transactional loan,
10. Title pays the real estate investor the profits from the transaction.

“Short Sale;” meant nothing to most people just a few years ago. It was term found sparingly in the conversations of a few real estate agents who had to deal with one of “those” properties.

Now, with the misfortune of the mortgage and financial meltdown, the term “short sale” is on the tip of the tongue of every broker, news anchor, neighbor, and barber. While it’s become an everyday buzzword in the real estate investors and brokers, it is often misperceived as negative impact in the housing market.

Another perspective may be that short sales are having a tremendous positive impact and the process helping to correct and bring us out of the housing crisis.

Whether you are a house hunter, broker, home owner, or real estate investor, chances are the Short Sale has benefits you’re going to like:

• Want to find a great deal on a new house?
• Agency brokerage business down?
• Mortgage underwater on your property?
• Tired of fighting for deals at the foreclosure auctions?

The short sale process is the medicine for all of these conditions. And guess who else is a pretty big fan Short Sale: The lenders.

• Patient home buyers can get a great deal on a short sale property.
• Hard-working agents can build a business around listing short sales.
• Borrowers can get relief from foreclosure by agreeing to a short sale.
• Investors can earn profits flipping short sales.
• Lenders would rather not be property owners and reduce holding time.

Next time short sales come up in your cocktail party conversation or business meeting, consider the benefits this process is having on the real estate market.

Pick Your Funding Partners Carefully

The phrase “do what you say you are going to do” is underappreciated. Fulfilling your commitments, both verbally and in writing, is the most basic business principle.

Doing what you say you are going to do sure seems sophomoric doesn’t it? Unfortunately, in the world of chaos, greed, competition and economic uncertainty this principle can be misplaced.

Not fulfilling even small commitments is very harmful to your integrity and reputation.

“I will call you later today”

Before one opens their mouth, they should really analyze whether or not they can perform. This is true both personally and professionally. “I can raise the funds for this business transaction”, “I will call you later today”, “I can get it done”, “I will meet you and 10:00”, etc. All comments thrown out there casually yet create deep obligations for the communicator. The minute these are said, construction should already be brewing for performance.

The true leaders in business are men and women of their words. What happened to the handshake deal? Our community has crafted protections behind the “handshake” that, not only creates noise and distraction, but allows for room and non-performance. I treat everything as a handshake deal. Frankly, all I have is my handshake and reputation. Reputation and integrity are irreplaceable and should be treated with the utmost respect and be held on a high pedestal.

I have been on the verge of several business transactions that only came crashing down due to non performance. Non-performance from empty promises. Business people “talking the talk” but not “walking the walk”. Tremendous amounts of time and risk are involved with preparing and structuring financial transactions and performance from ALL partners is the key to success.

The minute there exists a weak link in this team is the minute your efforts become wasted and your risks increase.

Performance is Profit

In the world of business transactions; whether it be large commercial real estate deals, single family residential fix and flips, funding operating business ventures, structuring complicated tax deals, placing large debt instruments into the capital markets, structuring and selling private placement offerings, lending or borrowing hard money funds, or just performing as an employee of a large institution, reliance on other individuals is crucial for success.

“Two head are better than one” and division and focus of expertise is an important component to efficiency and productivity.

So, pick your partners right, especially on the funding side of things. Performance is profit. Don’t work with the cowboys with no cattle.