Lou Castillo

Conventional Lenders for Wholesale Purchases
by Lou Castillo

This question came in the other day so I wanted to cover it. If you are trying to buy wholesale property or sell a wholesale property and the purchase price is coming from a conventional lender how does that work? A conventional lender is not going to be happy with a wholesale deal. They donít recognize the assignment of contract because they want the seller of record and borrower to be on the same contract.

In an assignment for instance, if you are the wholesaler, youíre the one that is actually on contract with the seller and what you are doing is assigning your rights to a buyer. A conventional lender doesnít recognize that. They will also not finance in a wholesale fee. Letís say you are the buyer and you want to purchase a wholesale property and you go to a conventional lender. The lender wonít recognize the contract and wonít finance the assignment fee. So what can you do? You have to get around it legally.

Letís do this from an example that you are the wholesaler. I think that will be the easiest way to walk through this deal. Letís assume that you are the wholesaler. And youíve got a property under contract with a seller and it is a great deal. The first thing you want to do is filie an affidavit, memorandum of purchase and sale agreement. Itís a one page document that you sign and you have your signature notarized that says that you are affirming that you do have a valid purchase and sales agreement on the property and that you are ready, willing and able to close.

Anyone else should beware and not take any action on that house because you have this valid purchase and sales agreement. Take that to the county records department wherever legal notices are filed on properties and have that paper filed. It will cost you $10 or $15. What it basically does is put a cloud on the title and stops anybody else from being able to purchase the property without first getting it released from you. Itís a great way to protect your wholesale deal in the first place.

Letís put it to work in this situation, your buyer comes to you and the only kind of purchase loan they can get is from a conventional lender. Normally youíd just have to walk away from this because there is no way they could do it. There is a way to structure this deal so they could get the loan on the property. Remember the bank is requiring that the seller of record, which is your current seller, and the borrower, which is your investor buyer are together on the same purchase and sales agreement. What you are going to do is go back and write up a brand new purchase and sales agreement between your seller and your buyer at the new price. Letís say you purchased the property at $150,000 youíre going to make $10,000 on it so the new price is $160,000. Youíll explain to your seller that you are partnering up with somebody and that you are going to use that extra money to do repairs necessary on the property. Get them to write up the new contract between the seller and the buyer at $160,000.

Your conventional lenderís requirement is now taken care of. The seller of record and the borrower are on the same purchase and sales agreement. But that left you out of the deal correct? Well down in the stipulations section youíll write down that the seller is going to pay you or whatever entity you are in a fee of $10,000 to release your interest in the property. They are going to pay you $10,000, thatís your deal. Some may ask that now that the buyer and seller know each other, couldnít they go behind my back and draw up a brand new deal all together? Well, yes they could but donít forget that you really have a valid interest in the property.

Remember that affidavit that you filed that is a cloud on file. If they try and go behind your back you can stop it because they have to get your release in order to do the deal. You are still in control. The lender then is going to approve the loan. And then go to closing and the house will sell now for $160,000. The seller is going to pay you $10,000.

Is there anything illegal? Here is what attorneys have told me in the past. The test as to whether it was legal or not:
  • Was it all fully disclosed to the bank?

  • Did the transaction, as it occurred in reality, accurately be documented in the paperwork?

  • Did we disclose everything to the lender?
Yes, we disclosed that the buyer was going to buy the property at $160,000 from the seller and that the seller was going to pay us $10,000 to release our interest in the property. The buyer did buy the property from the seller for $160,000 and the seller really did pay us $10,000 to release our interests. Did we have a bonafied interest? Yes we did. When the closing agent does a title search they will find our interest in the property which was the affidavit. All of it was legal. What we disclosed in the transaction and the paperwork was representing exactly the way the transaction occurred in reality. There was no bank fraud in there.

That is what everybody is concerned about. Well the bank knew everything and they will approve of the seller paying you. There is no problem with that even if they donít like it when the borrower gets money back. You are a third party to this transaction and they are going to see that and are going to be very happy with letting you get your assignment fee out of the deal. As long as you are not calling it an assignment fee but a fee to release your interest in the property. Thatís the easiest way to set a wholesale purchase up so that a conventional lender will work with you.

Lou Castillo
Lou has been successfully investing in real estate since the early Ď90ís, and is now sharing his vast experience with investors around the country. Louís students are earning tens of thousands of dollars monthly on their deals using his system. Unlike many of the speakers and mentors in real estate, Lou has both an undergraduate and a Master's Degree in Business and Marketing, and for 12 years he worked managing a 50 million dollar business for American Express.

He was on his way up the corporate ladder until he recognized that real estate offered a greater opportunity for financial freedom, and for the lifestyle he desired. Using his powerful formulas Lou was able to retire from his corporate job at age 37 and follow his passion - his first love - which is investing in real estate.

Lou has developed proven systems that create massive wealth through real estate investing. His unique approach with students is to focus on implementation of techniques rather than the theory. He teaches the ďhowĒ of this business Ė not just the ďwhatĒ.

He has authored more than 7 books and courses about investing. His latest development ĎOnline Real Estate Empire' has been helping investors around the country achieve financial freedom through real estate.

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