One of the main strategies involved in foreclosures and short sales is the “art” of investing. The basic idea of a “flip” is to negotiate a purchase price with a foreclosure lender (based on your broker’s price opinion and negotiating skills) that is less than the price the property could sell for. to another buyer. .
If the difference between what the bank would accept and the final buyer’s purchase price is large enough (including closing costs, etc.), this “margin” in the numbers can result in a nice profit for the savvy investor.
Normally, these buy and sell transactions (called consecutive, double, A and B, or simultaneous closings) would occur on the same day, or even within a few minutes of each other. In the “old” days, it was quite common to have the entire double closing transaction financed by a single source of funds.
Then the executing lenders began changing some of the language in their approval letters. This new language prevented title companies from conducting double closing transactions with a single funding source. The solution in the investment community was to have a separate financing source for the purchase side (side A) and a separate financing source for the resale side (the ultimate buyer, side B).
This resulted in two separate closings with two funding sources.
Hard money lenders, with so-called “flash cash”, appeared to provide the double closing short sale investor with the necessary funds on the buy side (side A) of the transaction. This technique is still in use today, but it may be coming to an end.
Recently, some lenders have added new verbiage to their approval letters. The first is:
“There will be no transfers of ownership within 30 days of the closing of this transaction.”
And now a new one that replaces the old gibberish and has been added as an amendment to the escrow instructions:
“If the Buyer or the Seller knows, or believes that this transaction will occur in conjunction with, or simultaneously with any other sale or transfer, they must notify the settlement agent. If the settlement agent knows, believes, or is notified, this transaction will occur in conjunction with, or simultaneously with, any other sale or transfer, the settlement agent must contact the lender for additional written authorization to proceed or this approval will be deemed null and void.”
IT’S OKAY. I heard you, just use “flash cash” and make the second close separate from the first (there’s some debate about what 30 days really means). One problem I see is that, in the old fashioned way, “flash cash” investors were protected against loss because the deal normally closed the same day and the resale financing (side B) was locked in escrow. The big problem is that these “flash cash” lenders are lending at nearly 100% of fair market value AND the resale closing is not being held due to the amount of time that has to occur between the first and second closing.
It will be interesting to see what the alternative solution will be in the investor market.
I’ll be watching, and you?