How is Transactional Funding Used in Short Sale and REO Purchases?
Transactional Funding Short Sales-Reo’s is used when an investor has contracted a property for purchase and needs money to close. The transactional funding part comes in when the investor has an end-buyer who will buy his property – if he buys and closes on it. The transactional funding allows the investor with no money of his own to close on the property and resell it immediately to his end-buyer.
The investor is designated as the “B” member of the two-part closing where the original seller is designated by the letter “A”. The end-buyer is the next stage of the transaction and is designated as the “C” buyer. The transaction is referred to as the A – B leg and the B – C leg. If the investor has no money to buy the property from the “A” seller, he must use transactional funding to close this leg and resell the property to his buyer (“C”). The transaction is referred to as a “double closing” or A – B and B – C.
Short sales are where a property owner is upside down on his mortgage – he owes more than the property is worth. Instead of allowing his lender to take his property to the foreclosure sale, he gets the lender to look at doing a short sale. ‘
In this situation, the lender understands that if they can get a certain amount of money for the property it is better than going through a costly foreclosure process. The lender takes a “haircut” or reduction of the principal amount of the loan to be able to sell the property at or close to the current market value.
When an investor requests the lender to do a short sale and he gets approval on a workable price, he starts to resell it for a profit. The property owner’s lender will receive the proceeds from the sale that the investor must close on the A – B leg. The transactional funder supplies the money for the A – B leg because the investor has the property already sold to another end-buyer (“C”). Sometimes the A – B leg is closed with a different closing agent than the B – C leg which is workable if the investor “controls” the B – C closing agent.
The process for closing an A – B and B – C transaction for REO (bank-owned) properties is the same as for short sales. The transactional funder funds the A – B leg and the end-buyer buys the property from the investor in the B – C leg.
One issue with both of these types of purchases and sales is when the seller (bank or property owner) has a deed restriction imposed by the lender. This restriction is a contractual agreement not to sell or transfer the title to the property for a specified time. Usually this restriction is 30, 60, 90 or 120 days. Transactional funding is not applicable in these deed-restricted transactions but there are numerous legal ways to avoid having to hold the property for the restricted period.
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