What is Transactional Funding?
Transactional Funding simply put is where a buyer uses funds (wet funds) for a short amount of time, usually 24 hours our less, to facilitate a transaction. More and more investors are using transactional funding for short sale and REO flips because the fees are usually lower, there's never any risk to their credit and there's not as much red tape because they're not qualifying for a loan.
See it use to be that investors would flip their deals by doing a simultaneous or double closing and use their end buyers funds (dry funds) to fund the first transaction between them and the seller. This was all fine and dandy until 2008 when title companies began to crack down on these types of transactions. It wasn't that there was anything illegal about it, they just wanted the investor to fund the initial purchase with the seller, then they would do another transaction a short time later with the end buyer.
As these title companies began to tighten up their rules, investors began to seek Transactional Funding methods which would allow them to use wet funds to purchase the property from the seller and in turn sell the property the same day to an end buyer which would satisfy the demands of title companies. Keep in mind this type of funding is usually needed when doing Short Sales or purchasing REO properties from the bank because your not allowed to assign contracts when dealing with banks. So this is how it happens...
If we were the investors, doing a simultaneous closing, we would be buying from "A" which is the bank. We the investors are "B". We will be selling to our end buyer who is "C". So we are buying from "A" on the same day we are selling to "C" or in other words a back-to-back or same day closing. And it happens all the time. Especially now because of the new FHA laws put into place February 2010.
It seems as if FHA just can't make up their mind on this requirement. Up until February, FHA required that you had to be on title 90 days before you could sell the property to the end buyer. And since many first time home buyers used FHA because of low down payment incentives, most investors had to flip their deals to non FHA buyers because of title seasoning. Now with the seasoning requirement lifted, at least for the time being, investors have a broader market to sell their properties to.
As Transaction Funding becomes more and more popular, let me share with you some advantages and disadvantages. With Transaction Funding it doesn't matter what your credit score is because your credit is never pulled. This is very advantageous to beginning investors or even those who have fallen on hard times and have a less than perfect credit score. It means anyone who breathes can get funding.
It also means you don't need money because it's being supplied by the Transactional Funding partner. They even supply you with a Proof of Funds letter showing the bank you can in fact close on the property. There is no risk on your part because you're not applying for a loan or using any of your money to fund the deal.
The fees are much lower in most cases, compared to hard money or private money lenders and especially if you have a partner because they typically want 50%. You can expect anywhere from 2 - 3 points on the amount you borrow. Sometimes they will charge you a minimum amount if it's under $100,000. Some also have a per transaction fee between $400 - $500 and others don't. All in all, it will allow you to keep more of your profits, which is a good thing.
The disadvantages are that you only have 24 to 48 hours to close the deal. You are literally on title for maybe a few hours, if that. So you have to have your end buyer lined up ready to close or the deal never gets funded. Which means your end buyer has to be qualified and the lender must be willing to fund regardless of title seasoning. Some lenders won't lend because of title seasoning and others don't care. Make sure your end buyers mortgage broker knows what you are doing. They will know if the lender is ok with the whole title seasoning issue.
Transactional Funding for Real Estate Investors
We offer Transactional Funding for Real Estate Investors. We are the most competitive around... see for yourself!
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- NO PROCESSING FEES
- NO MINIMUM FEES
- NO CREDIT or INCOME REQUIREMENTS
- 2% on ANY amount up to $600,000
- Unlimited Proof of Funds