What is Pass-through Funding? Is It Still Legal?

Pass-through funding used to be a genius little trick that wholesalers loved, as it allowed them to flip a house without spending a dime of their own money. You’d lock up a property, find your buyer, and both deals close on the same day.

But then everything changed. States began cracking down, and attorneys found themselves in trouble. This practice, which everyone was doing, became essentially illegal in many places. So yeah, you need to know what it is and why it’s probably not the move anymore.

What is Pass-through Funding in Real Estate Wholesaling?

Pass-through funding occurs when you use your end buyer’s money to pay the seller, rather than bringing your own cash. Your buyer wires their money to the closing company, and that same money gets used to fund your purchase from the seller.

Both closings occur on the same day, and you never have to put up any money yourself. You still get paid your wholesale fee.

The whole thing works because the money literally passes through from your buyer to the seller while you’re just standing there in the middle, making it happen. You own the property for a few hours at most, but you never had to dig into your own pocket to make it work.

How Does Pass-through Funding Work

Pass-through funding only works if your closing company is agreeable to it and everything aligns perfectly on that day. Here’s what can happen.

Double Closing Process

You’re doing two separate closings on the same day. First, you close with the seller. In the second closing, you sell to your end buyer. Each one receives its own paperwork and deed because they’re legally two separate transactions, even though you’re essentially just flipping the property on the same afternoon.

People call it an A-B-C deal, and you’re sitting right there in the middle as the B, trying to keep both sides happy.

Pass-through Activity in A-B-C Transactions

Your end buyer wires their money into escrow, let’s say $180,000, because that’s what you agreed on. Now the seller needs $150,000 from you to close their side of the deal. But you don’t actually wire that $150,000 yourself.

The closing attorney simply pulls it straight from the $180,000 that’s already sitting in escrow. So your buyer’s money pays for your purchase, and whatever’s left after closing costs is what you take home.

Pass-through vs. Traditional Funding Methods

With traditional funding, you’re actually bringing real money to close that first deal, whether it’s yours or you borrowed it from somebody. That gives you way more breathing room because you don’t have to do both closings on the exact same day. Additionally, companies that are closing are much more comfortable with it.

Pass-through sounds amazing because you don’t need any cash, but everything has to happen perfectly and simultaneously. Additionally, these days, most closing attorneys will refuse to do it outright anyway.

KP Close provides compliant, reliable funding solutions that help you close quickly, keep your transactions on track, and avoid the pitfalls of outdated pass-through strategies.

When Do Investors and Wholesalers Use Pass-through Funding

Back when pass-through was still a thing, wholesalers would use it in pretty specific situations. Let’s discuss when people actually choose this option.

Limited Capital for Closing Costs

This was the big one. Most wholesalers don’t have $100,000 or $200,000 just sitting in their bank account waiting to fund deals.

You’re probably running multiple deals at once, maybe you’ve got some money tied up in marketing, and suddenly you’ve got a closing next week, and your account balance is looking sad.

Pass-through funding meant you could still close that deal without scrambling to find the cash or begging your uncle for a loan.

Same-Day Double Closing Scenarios

Sometimes, you’d line up a buyer so quickly that it made sense to complete both closings on the same day.

Your buyer’s already wired their money, and the seller’s ready to sign. Plus, everyone’s available on Tuesday afternoon. Why wait around for days when you could complete both transactions and get paid today?

Pass-through made those fast deals possible without requiring you to transfer money between closings.

Avoiding Assignment Disclosure Requirements

Some wholesalers used pass-through arrangements specifically because they didn’t want to inform the seller that they were assigning the contract to someone else for a fee. With an assignment, you have to disclose everything now, especially after the 2021 law changes in North Carolina.

But with a double closing using a pass-through, you could technically be the actual buyer on paper. You just sell it right after, and nobody has to know exactly what you made on the spread.

Working with Reluctant Closing Attorneys

Not every closing attorney or title company was comfortable with assignments, even before they became legally required to disclose all relevant information. Some of them just didn’t like the optics of it or didn’t want to deal with explaining to sellers why there was suddenly a different buyer.

Managing pass-through funding projects with a double closing made these attorneys way more comfortable. This is because, on paper, it appeared to be two separate, normal transactions instead of one deal with an assignment fee added.

Benefits of Pass-through for Wholesalers

Why did everyone love this so much before it became a legal headache? Let us list the reasons:

• Zero capital required. You could close deals all day long without ever touching your own money. This means your cash could be allocated toward marketing or securing additional properties, rather than being held in escrow.
• More deals at once. When you’re not limited by how much cash you have available, you can run way more deals simultaneously. Your money isn’t stuck in one closing while another opportunity passes you by.
• Fast turnaround. Both closings happen on the same day. That means you’re getting paid immediately instead of waiting around for your buyer to close while you’re stuck owning a property you just bought.
• No credit needed. You didn’t have to qualify for loans, have perfect credit, or convince a lender that you were worth the risk. The end buyer’s money did all the heavy lifting.
• Lower barrier to entry. New wholesalers could jump in and start doing deals without needing a huge pile of savings or rich friends to bankroll them. It made wholesaling accessible to pretty much anyone.
• Simplified accounting. You weren’t moving money in and out of your accounts multiple times per deal, which meant fewer transactions to track and less paperwork at tax time.

Legal Issues with Pass-through Funding

Pass-through funding evolved from being an effective workaround to a one-way ticket to legal trouble.

North Carolina’s 2021 Law Changes

North Carolina essentially eliminated pass-through funding around July 2021 when the state bar introduced new rules that changed everything overnight. No more blind HUDs and pass-through funding from any agency or buyer. Assignments now require full disclosure to everyone.

Closing attorneys who disregard these rules could face disciplinary action, including the loss of their license. That is why nobody wanted to touch or provide pass-through deals anymore, and wholesalers had to figure out new ways to close.

Illinois Brokering Without a License Laws

Illinois took a different approach and began labeling wholesalers as acting like real estate agents without a license, which is illegal. If you’re marketing a property to find a buyer, technically, you could get hit with brokering without a license.

Pass-through funding with a double closing became the workaround. You’re actually buying and selling the property yourself, not just marketing it, so you don’t need a license.

Deceptive Business Practices and License Loss

Multiple closing attorneys have actually lost their licenses because they got too creative in hiding wholesaler profits from sellers and buyers.

Regulators called it deceptive business practices, and some deals were even reversed after closing, with the deeds being rescinded. That’s why most closing companies are now terrified to touch pass-through funding at all.

Blind HUD Restrictions

Blind HUDs let each party see only their own closing statement, so sellers had no idea the property was being flipped for more money just an hour later. It kept everyone happy, and nobody asked questions.

However, most regulators shut that down in most states. Now, everything has to be disclosed and transparent. This killed the whole appeal of pass-through for wholesalers who didn’t want their spreads exposed.

How to Deal with Pass-through Compliance Challenges

If you’re still trying to make pass-through work or you’re stuck dealing with attorneys who are freaking out about it, here’s what you need to know about government compliance.

Work with Closing Attorneys and Title Companies

Your closing attorney is either going to make or break your deal, so you need to find one who actually understands wholesaling and knows what’s legal in your state at the current time.

Some attorneys refuse to do anything that even appears to be a pass-through because they’re worried about their license. Meanwhile, some will work with you if you follow every rule and disclose everything.

Have that conversation way before closing day and build relationships with a few different closing companies. Don’t be afraid to shop around.

State-by-State Interpretation Differences

Every state handles this stuff differently, and even within the same state, you’ll find closing companies that interpret the laws in completely opposite ways. What’s totally fine in Florida might be illegal in North Carolina, and what worked last year might not fly anymore.

Consult with multiple attorneys in your market to determine their comfort level. One attorney might refuse to do something that another attorney does every single day.

Alternatives to Pass-through Funding

Pass-through projects are basically dead in most places, but don’t freak out because you’ve still got options. Here are some alternatives to pass-through funding that might work for your deals:

Transactional Funding

This is the new strategy that replaced the pass-through entity for most wholesalers. You bring in a transactional lender who funds your purchase from the seller with their own money, and then you immediately sell to your end buyer and pay the lender back the same day.

The lender charges you a fee (usually a percentage of the loan amount or a flat rate), but you still don’t have to bring your own cash to the table. It’s legit and legal everywhere.

Closing attorneys actually like it because the lender wires real money for the first closing instead of messing with escrow funds.

Assignment of Contract

This is when you literally just assign your contract with the seller directly to your end buyer, and they step into your shoes and close with the seller themselves. You never actually own the property; you just collect an assignment fee for bringing the deal together.

The downside is that, in most states, you now have to disclose everything to the seller, so they’ll know exactly what you’re making. Some sellers don’t care, and some will try to renegotiate. There will also be sellers who will just walk away when they see your fee.

Using Your Own Capital

If you have the money available or can access it quickly, consider funding the deal yourself. Wire your own cash for the first closing, own the property for a few hours or days, then sell it to your buyer and get your money back plus your profit.

It’s the cleanest way to do it. Nobody questions anything, and you have total control over the timing. The catch is you actually need to have that money available, which most new wholesalers don’t.

Hard Money Lenders

Hard money is different from transactional funding because these loans are intended to last longer, typically ranging from a few months to a year. You’d use hard money if you’re planning to hold the property for a bit, maybe do some light rehab, or if your buyer needs more time to close.

The rates are higher than those of traditional loans, and you’ll pay points up front. However, this also provides you with significantly more flexibility.

How to Choose Between Pass-through and Transactional Funding

If you’re even asking this question, the answer is simple. Opt for transactional funding and eliminate the need for a pass-through activity. Pass-through is either illegal or a gray area in most states, so you’re just asking for trouble. And even if you find a closing attorney willing to do it, you’re risking deals falling apart or worse.

Transactional funding costs you money, typically ranging from $500 to a few thousand, depending on the loan amount. But you’re buying peace of mind and legitimacy, unlike pass-through entities.

The lender wires real funds, and the closing company is happy. Nobody’s worried about breaking any laws, and you’re not the one who becomes the test case when your state decides to crack down. Just spend the money on a transactional lender and sleep better at night.

The Transactional Funding Process for Wholesalers

Here’s what you should expect if you’ve decided to go the transactional funding route. That’s a smart choice, by the way.

Step 1: Reach Out to Your Transactional Lender

The first step is to contact a transactional lender as soon as you have a deal lined up. Don’t wait until three days before closing, as lenders need time to prepare everything.

You’ll send them your A-B contract with the seller and your B-C contract with your end buyer, along with basic details such as the property address and closing date.

Most lenders will review your contracts to ensure the numbers work and the deal is legitimate before committing to funding it.

Step 2: Lender Coordinates with Your Closing Company

Once the lender approves your deal, they’ll reach out directly to your closing attorney or title company to start coordinating everything. The lender needs the most updated HUD or settlement statement to know exactly how much money to wire. They’re constantly checking in as closing day gets closer.

Your closing company will schedule both closings for the same day. Everyone stays in communication to make sure nothing falls through at the last minute.

Step 3: Sign Your Loan Documents at Closing

On closing day, you’ll sign loan documents from the transactional lender along with all your regular closing paperwork. These loan documents simply indicate that you borrowed their money and are repaying it from the second closing.

It’s straightforward, with nothing complicated, and you’ll sign everything at the closing table when you purchase from the seller.

Step 4: Lender Wires Funds, and Both Closings Happen

Your end buyer’s wire needs to be in escrow, and everyone needs to have signed their documents before anything moves forward. Once the closing attorney confirms that everything is ready, the transactional lender wires its funds to complete the purchase from the seller.

Both transactions close within hours of each other, and both deeds get recorded. Then the closing company releases everyone’s money. The lender is paid back, plus their fee, and you receive your wholesale profit as a check or wire transfer.

Key Takeaways: What is Pass-through Funding? Is It Still Legal?

Pass-through funding is essentially dead, thanks to legal crackdowns across multiple states. Trying to use it now is just asking for trouble. The entire system that made it work, including blind HUDs, pass-through escrow funds, and hidden profits, was shut down by new disclosure laws and attorneys losing their licenses.

Your next move is transactional funding, where a legitimate lender wires real money for your first closing and is repaid the same day from your second closing. Yeah, it costs a fee, but it’s legal everywhere, and closing companies actually want to work with you.

If you need a transactional lender who understands your needs and won’t waste your time, reach out to KP Close at (843) 823-1148. We know how wholesalers operate, and we’ll wire your funds without the usual headaches so you can actually close your deals. Fill out the form below to get started!