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The A>B, B>C Process Explained
Before we get into the specifics of the A>B, B>C Process, let's define the participants of the process:
Homeowner = Party A
Investor Buyer = Party B
End Buyer = Party C
The initial contract is the A>B transaction in which the homeowner grants the investor an "equitable interest" in the property allowing them to negotiate with their bank, lien-holders, etc. In addition, the investor is granted the right to list, market for sale, and sell the property while negotiating and prior to purchasing from owner of record (homeowner), party "A".
The entire process and each possible scenario is fully disclosed in writing to ALL parties… including the banks.
Any offer or offers that come in are presented to the investor/buyer as they are now the ones legally selling the property (B>C) via their equitable interest as granted to them by the owner.
Once the approval letter is secured by our negotiators from the bank(s), the decision is then made whether to purchase the property (A>B) and re-sell it (B>C) or to use one of the following exit strategies:
1.) A>B, B>C… Immediate buy/sell (Realtor is paid on both transactions….earning double commission)
…sometimes on the same day but normally after 30 days OR
2.) A>B, B>C… Buy/Hold/Rehab (Realtor is paid on 2nd transaction no matter how much time goes by during the
waiting and/or rehab period).
The A>C Process Explained
Before we get into the specifics of the A>C Process, let's define the participants of the process realizing that the investor (B) is still part of the process but steps aside during the process:
Homeowner = Party A
End Buyer = Party C
Due to the fact that many bank short sale approval letters are including language that prohibits the re-sale of the property for 30, 60, 90, or even 120 days, a different approach needs to be taken, hence the A>C Process.
When there is already a "C" buyer lined up and ready to go, it normally makes more sense for the investor (B) to "release" their interest and consequent contract with the owner of record so that the "C" buyer can purchase directly from the owner of record (homeowner), party "A".
In this A>C Process:
1.) The Realtor is compensated by getting their full commission (whatever the bank agreed to pay).
2.) The investor is compensated from the buyer by getting a “Release of Contract” fee. This fee is the difference
between what the bank accepted and what the "C" buyer was under contract to pay while buying from the
Let's Look at an example of the A>C Process
Let's assume that we got a letter of approval from the bank that they would accept $150,000 (combined amount from all the banks and/or lien holders). So now that we (the investor, party B) knows what the bank(s) will accept, we decide to sell it to a buyer (B>C) at the contracted price of $160,000. As such, the amount of the release would be $10,000. NOTE: The possibility of the transaction going A>C is fully disclosed to the bank as well as to the buyer once the offer comes in from the end buyer, party "C".
The end buyer knows upfront that this could go A>B, B>C or simply A>C, but regardless their end price will not change or be increased 1 penny due to the investor involvement. As such, the total price did not change and was therefore, still the same $160,000 price to the end buyer, party "C".
The release fee is a separate transaction and has nothing legally to do with the new contract between the owner of record (the homeowner, party "A") and the end buyer, party "C".
Therefore it does not and frankly should not be on the HUD-1... and this complies with RESPA and ALL bank approval letters. Should the approval letter state that the fee must be both disclosed and approved, it will be on the HUD-1. If, in the event the buyer needs to "mortgage" that amount as they do not have the cash on hand, it can be added on the HUD-1 as a buyer side closing cost as long as it is OK with their lender.
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