Transactional Funding – Learn the Basics
There is a lot of confusion about transactional funding among new investors. It simply sounds as if funding a deal, whether hard money or in one day, is all the same. In fact, there are a number of types of fundings that are called “transactional” but they are not what is the industry standard for this term. In this article we will omit gap-funding, bridge funding, owner occupied residential funding and any commercial loans other than the types that follow:
Type #1 – Transactional Funding is normally associated with a “double closing” in real estate transactions. The lender will fund 100% of the buyer’s cost to close the A – B leg. The ideal situation is where the two closings (A – B and B – C) take place with the same closing agent on the same day.
The original seller designated as “A” in the closing sequence sells to the investor (“B”) who in turn sells to his end buyer (“C”) and the transaction is referred to as an A – B and B – C or a double closing.
The closing agent on the A – B transaction can also be a different closing agent than the B – C closing agent. This is very common in short sales and REOs (Bank-owned properties). In some states the recording of the deed is not done electronically into the public records and in these cases the B – C closing will be delayed by days.
If the same closing agent is doing both “legs” of the A – B and B – C closings electronic recording doesn’t matter as he will instruct the county clerk to record the two deeds (A – B and B – C) in the proper order. Occasionally a clerk or the closing agent will make a mistake and record the deeds in the incorrect order resulting in the investor showing as the owner of the property! This is easily corrected by the closing agent.
In summary, a “true” transactional funding is done on the same day or a couple of days deferred on the second leg (B – C).
Type #2 – In this situation the B – C leg is deferred for any number of reasons, including but not limited to – end-buyer changes his mind, end-buyer can’t get his funding timely and sometimes the sale has a deed restriction. A deed restriction is simply a contract covenant that stipulates the buyer cannot resell the property for a specified time period, typically 30, 60 or 90 days. This is often referred to as “Extended Transactional Funding” for obvious reasons as the closing of the B – C is extended for hopefully a specific and limited time period.
Extended transactional funding is usually twice as expensive as transactional funding since the lender carries the risk of the end-buyer defaulting and the property not being resold timely. As a transactional-type funding moves into two or more months, you now will likely have to get a hard money loan.
Type #3 – Hard money loans are what investors are most familiar. In this case the lender will lend for months or years with a typical expiration of one year on his mortgage and note or deed of trust. In these loans, the property value is carefully evaluated, the investor must have 10% to 20% of the purchase price to close and many hard money lenders require credit checks. The final loan costs can easily be 5 to 10 times more than transactional funding because the points and monthly interest charge can easily exceed the cost of a complete transactional funding.
In summary, know that your end-buyer is “strong”, committed to closing and that he can close timely. Get a Proof of Funds (“POF”) online or otherwise so you can overcome Realtor® objections to this potential deal killer. Always try for a same day or double closing but if you can’t do it, make sure you have options for funding your deals at the last minute. Very often lenders doing short sales only tell the investor/buyer the day before the closing that there is a deed restriction! To see more transactional funding examples. visit https://transactionalfundingfl.com/transactional-funding-video-examples/
PS – If the A – B closing agent is designated by someone other than you, don’t ask if their closing agent will do a double closing or you may quickly find an uninformed closing agent or seller who thinks you are doing something illegal!
To your limitless success,