When a “seller” wants to make their profit on a spread (the difference between two prices), they do so through a pass through transaction. Simply put, a reseller has a contract with a principal seller at one price than attempts to resell it to an exit buyer at a higher price. In a nutshell, the transaction simply passes from the principal seller through the reseller to the exit buyer with all reps and warranties conveyed. Here’s how it works.
With a bank
In my experience, I have yet to find any bank that would allow a pass through transaction. Banks always require a POF or liquid unencumbered funds in an escrow account to issue a purchase agreement. Most resellers have neither the funds nor a valid purchase agreement. Many are simply trying to use their exit buyer’s POF to secure the tape with a purchase agreement from the bank. The only way to accomplish this is the following:
1. Buyer receives inventory and completes all due diligence up front.
2. Buyer executes a purchase agreement.
3. Buyer deposits non-refundable full funds into an escrow account at the reseller’s title company handling the closing.
4. Reseller’s title company issues an attestation letter directly to the bank that full funds are available and in escrow for the transaction. What they don’t tell the bank is that the funds are not actually the resellers, but their buyer’s.
5. Bank issues the purchase agreement.
6. At closing, bank sells to reseller who sells to the exit buyer (double closing).
With a private seller
Many private sellers will entertain a pass through transaction.
1. Buyer received inventory and completes all due diligence up front.
2. Buyer executes a purchase agreement.
3. Reseller provides exit buyer purchase agreement to the private seller.
4. Private seller issues their purchase agreement to the reseller subject to the exit buyer providing proof of funds.
5. Reseller puts private seller/reseller purchase agreement into escrow.
6. Buyer verifies private seller/reseller purchase agreement and provides POF via escrow.
7. Reseller has private seller contact escrow to verify buyer’s proof of funds.
8. At closing, transaction passes from the private seller through the reseller to the exit buyer with all reps and warranties conveyed (pass through transaction).
Remember, the first question to ask a reseller is if the package is from a bank or private. If is with a bank, I would absolutely walk from the deal. If it is with a private seller, then there is a very good chance of putting a deal together.
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{ 2 comments… read them below or add one }
I’m thinking of buying a few houses on my street that have been foreclosed on and renting them out or selling them on lease purchase terms…what do you think????
Dan,
Before you do, you might wish to consider a contract for deed program. See “Make Money like a bank” posting.