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How to Use Transactional Funding
Transactional funding is a short term loan used to fund consecutive real estate closings. Transactional funding is a short term loan which is given to a real estate investor planning to do what is often referred to as a quick flip.
Transactional funding is often explained where the transactional funds are used between the time the original property owner signs the closing documents he is required to sign and the time the end-purchaser signs his required closing documents. The transactional funding is defined by the timeline the buying investor requires money for the “A – B transaction” to be funded.
The buyers and sellers in the transaction are designated by the letters “A” (original property owner and seller), the investor “B” (both a buyer and seller), and the final buyer “C” who will be the final owner of the property.
Transactional funding is also known as Flash Funding because the actual time of this real estate financing should only take minutes or hours. Some closing agents in different states escrow both sides of the closing until all the money and documents are in place and afterward they finish the exchange of the deed to the property. If by any chance, the closing agent needs court orders or city examinations, these closings can be delayed for days or even months.
The transactional funder should not have his cash sitting in the closing agent’s escrow account all this time but rather he should wire in the money only on the day of the closing of both “legs” of the double closing. Transactional funding is desirable over different types of short time financing and is somewhat similar to hard money. However, the cost of transactional funding is much lower because of the time period involved and no credit report on the buyer is needed and the documentation required is negligible.
There are transactional funding funders who publicize 30 day transactional funding, 60 day transactional funding and even 90 day transactional funding. In fact, these extended time periods are not transactional funding but rather are hard money loans referred to as Extended Transactional Funding. When the property is sold to an end-buyer, the loan is then paid back. Typically Extended Transactional Funding has points and expenses connected to borrowing it.
Extended Transactional Funding
Now and then an investor may require more than one day to flip a deal. That is the place where Extended Transactional Funding is valuable. Extended Transactional Funding is a loan which is short term that for most cases can have a term up to 90 days. There are situations that obligate an investor to get funding for an extended period. The following is a list of some of these situations.
When you purchase an REO or bank-owned foreclosure you likely will have to use the closing agent the bank uses. This closing agent will almost never allow a double closing so you’ll need to close the B – C leg elsewhere and on another day.
There are times when a lender will approve a Short-sale but impose a deed restriction by requiring that the property’s purchaser can’t resell or reoffer the property for sale for a specified time period. This required holding period can be 30, 60, 90 or even up to 180 days.
When an investor wins a property at a foreclosure or tax deed auction, he normally has to pay the full purchase price with a cashier’s check at the end of business that day or the following day at noon time. Once the property is paid for and the new special deed is recorded, the investor is on title as owner and can then flip that house to an end purchaser. However, this won’t happen the same day as the sale. A short term loan (Extended Transactional Funding or a hard money loan) is required for that holding period from when the investor wins the auction and pays for his property until he closes on the B-C closing.
A so-called “consecutive closing” is actually two closings – the purchase and consequent resale of a property – planned for two separate closings. These transactions normally include the purchase of undervalued real estate that will be resold for a profit in less than 48 hours or even a shorter timeframe. When an investor uses transactional funding the lender will not require a credit check or paycheck confirmations. The absolute requirement that lenders will not budge on is that an investor has to have an end buyer under contract to purchase the property subsequent to closing the first transaction.
FHA rules express that a loan application can’t be processed until the seller is recorded on title. Hence, in the event that an investor needs to flip a house, the underwriting procedure for your end purchaser can’t start until after you have closed on the property. Accordingly, the loan typically takes from 4-8 weeks for the new purchaser to get the loan approval.
Extended Transaction Funding is another kind of loan whereby an investor can get transactional funding to purchase Seller A’s property and offer it to an end buyer C within a predefined time, typically the inspection period so as not to risk the loss of his earnest money deposit (“EMD”). The primary difference between transactional funding and Extended Transactional Funding is the deferred amount of time between the A-B and B-C closings. This Extended Transactional financing is suitable for double closings that require a holding period before the title to the property can be deeded to an end purchaser.
Transactional funders will take care of all expenses connected with the A-B closing for the investor buyer. The funding fees are then deducted from the investor’s profit on the B-C closing. This allows the investor to not need any of his own money to close the A-B transaction.
In the past many investors would flip properties by doing a double closing by using their end buyers’ funds to finance the A-B closing. However, with the tightening of regulations by title companies, because of title insurance issues, financing industry policies and regulations, this end-buyer financing has been dramatically reduced. Now-a-days, real estate transactions are often funded before they can be re-sold.
This is the way the procedure works when using transactional funding:
- The Buyer or Investor or Flipper, called party “B,” writes an agreement to buy a property from the seller “A.”
- The Buyer “B” signs this agreement with end Buyer “C” to buy the property on the same day that “B” buys it from “A.”
- “B” looks for transactional funding to support the deal because he needs to purchase the property from “A” and re-sell it to “C”.
Transactional funding has huge benefits. The benefits of transactional funding are as follow: Credit score, salary of the borrower and down payment are not required. Secondly, the funding is normally 100% of the purchase price. Transactional Proof of Funds Letter is traditionally given by the transactional funding lender for the buyer to prove his credibility with a seller or listing agent. Transactional funding has limited risk for lenders and the documentation is easy to complete.
Transactional Funding Proof of Funds letter:
When you locate a good deal, whether it’s a short sale, REO or whatever, the selling bank usually asks for a Proof of Funds Letter. This document can be your monthly bank statement or if your bank balance isn’t “strong”, you can get one from a transactional funding lender.
Increasingly banks are also looking for proof of funds letter in order to verify that you can even make an offer on their properties. They need to see real evidence that you have the cash in your bank to actually pay for your purchase.
However, it is uncommon for the actual seller of a property to ask a buyer to show that he has the cash to buy his property. Most often a Realtor (listing agent for the property) is the one who requests a Proof of Funds Letter (“POF”). This kind of proof of cash available from investor buyers is often difficult to obtain. When you obtain a Proof of Funds Letter for making offers you can significantly increase your ability to induce more sellers to consider your offer over other investors who do not have a POF.
In summary, there are online reviews available so you can find the best transactional funding for your personal needs and who offers the best transactional funding services.
What is the Best Place or Time to Use Transactional Funding?
Every investor is looking to seek maximum profit out of his or her real estate transactions.
In the real estate business, the term “transactional funding” is widely and commonly used but not always for the same reason.
In some real estate fundings a wholesaler purchases the property and may use the end-buyer’s money to close the double closings.
By using this technique, he does not use his own money but instead makes his profit from the “left-over” end buyer’s funds.
Some closing agents call this process illegal but it is illegal only in the sense that the closing agent’s title insurer will not allow it.
It is always legal if both the seller and buyer are fully disclosed about terms of the transaction.
The issue is that the buyer and seller will both be able to see the profit the investor is making on the deal.
If the investor’s profit is too large in the “eyes of the beholder” either or both the end buyer and the original seller may not come to closing.
Because of the potential loss of the deal because of the size of his profit, most investors use transactional funding to fund the A – B leg of their double closing.
This transactional funding or short-term loan insures that the original seller and the end-buyer do not see the investor’s profit at their closings.