What is Transactional Funding?
What is Transactional Funding ? – Transactional Funding is a method of supplying money for an investor’s purchase of a property which has already been resold to an end-buyer. The money is usually used for less than a complete day as the investor closes with the seller and his end-buyer closes later in the day. There is a What is transactional funding guide at the bottom of this page for easy reference.
How Does Transactional Funding Work?– The funding process starts when an investor gets a property under contract from a seller. It can be a single-family home (SFH) or a multi-family property but the key to the transaction is the investor doesn’t have the money to close the purchase with his seller. However, if he has found a buyer, then, and only then if he can close the purchase with the seller, he can then sell to his end-buyer and make a profit.
By getting Transactional Funding for the initial purchase of the property, he can then sell to his end-buyer and complete the transaction and make his profit.
Why Not Just Do an Assignment of Contract? – Lenders doing short sales and selling REOs (bank-owned properties) do not allow the investor/buyer to assign his contract. The exception is if there is a relationship between the investor and the assignee – usually a funding source who wants their name on the title. However, there is no guarantee that the lender will allow the name change on the contract.
Another reason that Assignments aren’t used is the seller, their listing agent or their attorney will not allow it. Finally, if the profit to the investor for the transaction is “too large” by the seller’s or end-buyer’s standards, either party may not close. If the net profit to the investor is greater than $15,000+/-, the cost of Transactional Funding for a double closing is cheap compared to the possible loss of the deal!
What do the Letters A, B, C Designate in a Real Estate Closings?– These letters are most often used in reference to a double closing where “A” is the original property seller, “B” is the investor and “C” is the end-buyer. A Double closing is then shown as an A – B and B – C transaction.
What is a Double Closing?– A double closing is defined as the closing of the purchase and sale of a property twice in the same day. The end-buyer can close first or second, but the original seller must close the same day for Transactional Funding. If the A – B “leg” closes on any day and the B – C leg closes another day, “extended” Transactional Funding is actually required. This extended use of the money will actually be a hard money loan and will usually need a mortgage and note to secure the lender’s money.
What is a Simultaneous Closing?– This term is often used in place of the term Double Closing. However, for knowledgeable people in the industry, the simultaneous close actually means that there are “three interested parties” represented at the closing – the seller, the buyer/investor and the lender who is closing a mortgage on the property. The mortgage is then closed simultaneously with the property.
What is a Hard Money Loan?– A hard money loan is a loan on a real estate property’s purchase where the property is not resold the same day it is purchased. The interest rate on hard money loans reflect the risk involved in holding a property in the local real estate market and later possibly having to foreclose on the property. The success of the loan is also a function of whether or not the rehab of the property is successful.
The cost for hard money loans varies greatly, as they have documents prep fees, inspection and miscellaneous costs as well as points (one point = 1% of the purchase price) and an annual interest rate. The points can be as little as 2 points to as many as 10 points and the interest rates can be from 8% to 20% annually. For a $100,000 loan with three points ($3,000) and doc prep fees of $1,000 with an interest rate of 12% for six months = $3,000 + $1,000 + (12% x $100,000/12 X 6 = $6,000) = $4,000 + $6,000 = $10,000 total in this example or a net of 10% of the money borrowed. Transactional Funding on the same amount could be as little as $800.
What is Private Money?– Private Money is money that will be loaned to an investor/buyer that does not come from a licensed mortgage lender. Essentially, the Private Lender uses his savings or retirement monies to fund real estate transactions. Private money lenders are preferred to hard money lenders because their cost to borrow is very negotiable. Seldom do Private Money lenders loan Transactional Funding because of the complicated nature of the double closings, the precise transfer of the monies, title issues and fraud by sellers and buyers.
How is Money Supplied to the Investor for the Closing?– In years past, closing agents would accept a Cashier’s Check from a buyer and he would pay the seller with a “Trust Account Check”. Because of a huge amount of fraudulent cashier’s checks, very few closing agents will accept a cashier’s check from a buyer.
The standard for closing today is domestic wired funds. I say “domestic” because international wires can have transfer balance limits and are often held by the Federal Reserve for hours or days for security reasons. If you are going to work with an international buyer, have him wire his funds into the closing agent’s escrow account at least two days before the actual closing.
Why Not Just Use the End-Buyer’s (“C”) Money?– Generally speaking, if not done properly, this is the fabled “Illegal Flip” that has maliciously branded investors as law breakers. If you decide to try asking the end-buyer to use his money, you’ll need him, the seller, yourself and the closing agent to sign a Disclaimer stating all these parties know what you are doing and agree. I have seen this Disclaimer kill every deal where the investor tried to use it. The investor’s goal is to save a few dollars of funding costs with the result of losing the deal. Many closing agents will not allow this end-buyer’s money to be used for the A – B leg under any circumstances!
What if the A – B and B – C Legs Close at Different Closing Agents?– Many Transactional Funders will not do these “double agent” transactions because they feel they lack control. However, we understand that many short sales and REOs are closed at the closing agent chosen by the lender in the A – B transaction. We are able to do these two-agent closings even when one closing agent is out-of-state. Obviously we prefer to have the B – C leg closed with our preferred closing agents but we understand that this is not always possible.
How Much Does Transactional Funding Cost?– I have a survey online at www.TransactionalFundingFL.com which compares our rates with local and national lenders. Investors in the tri-county area of Dade, Broward and Miami-Dade Country receive a Discount off my posted rates up to $300,000. You must call for this Discount to be valid – 954-274-1003 and fill out the Application Form on our website.
What Do You Need to Decide if You Will Do the Transaction?– We need our Application that is online, contact information for the closing agent, the Preliminary HUD-1 Closing Statements for the A – B and B – C parties. Additional informational that we may need will have to be in our hands at least 12 hours before the closing. There is no Application Fee or any other additional fee, other than the funding fee, that we charge for the transaction. The closing agent may charge a document prep fee which you must discuss with the closing agent.
Important – we always retain the right to refuse funding for any transaction for any reason that we deem appropriate. If your transaction does not close timely we have the right to withdraw our funding immediately. Usually once the transaction is again ready to close, we will resend the funds. Stay in touch with the A – B and B – C closing agents so you are aware of any “glitches” that may stop or postpone either of the transactions.
What if the “C” Buyer Changes His Mind and Doesn’t Close?– While this doesn’t happen very often, it is always a threat. If the end-buyer decides not to close he risks his Earnest Money Deposit (EMD) which may not bother him. The result is the investor will likely lose his Transactional Funder or it may be “converted” to a hard money loan. The best way to head-off this undesirable possibility is to have the closing agent and yourself stay in touch with your end-buyer to alert him to what is happening and how soon he needs to be ready to wire his money. Also, a good preventative is to get him a Preliminary HUD-1 Closing Statement at least a few days before closing.
What Geographical Areas Does TransactionalFundingFL.com Cover? – We provide Transactional Funding in any city in Florida as long as the closing agent(s) are cooperative with Transactional Funders. We can also close transactions were the A – B closing is out-of-state if the property is in Florida and the B – C closing is also in Florida.
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