A Basic Introduction To Transactional Funding (Transactional Funding, Part 2)
In today’s lending environment, most lenders will not lend money for a transaction unless the name of the owner of a property is on the deed to the property. Lenders say that this is because they are attempting to prevent lending and real estate fraud. They say that it helps them insure that the property is actually in a position to be sold. Many of my colleagues say that the real reason is far simpler: it is a way for the lenders to make some extra money. Regardless, it’s in the books at this time, and if you want to flip short sales, you must find a way to deal with it.
The best way to handle this new requirement is to obtain transactional funding. In short, you need “one-day credit.” Sound like a problem? Fortunately, it’s usually not. Here’s how it works, and why your credit score does not even have to be involved:
When you set up a short sale deal, you have a homeowner who is walking away from the property, and you have a buyer who is ready to pay the purchase price (plus whatever fee you have added on for your services in setting up the deal) agreed upon by you and the lender. This is an ideal situation for many short term real estate investors because it does not require the investor in the middle (you) to actually buy the property. However, thanks to this new lending law, if your name is not on that deed, then in many cases your buyer’s lender will not fund the deal.
So you need the funding for the deal, but you do not actually need a loan that you are going to keep up for any length of time. This means that you do not really need to go through the extended and often problematic process of having your credit checked, your income verified, and all the other hoops that you have to jump through to get a traditional loan. You just need the funding for about 48 hours so that you can purchase the property, get your name on the deed, then finish the deal with your buyer. Transactional funding does this. Basically, your transactional funding source sends you the funds so that you can do the deal with the lender. You are charged a number of loan points for this service. Then, you do the deal with your buyer, and the lender gets their money back (plus their fee) and you walk away with the difference.
Sound a little like superfluous work? It is. But understanding this type of funding will be critical to your success if you decide to flip short sales in the current lending environment.
Peter Vekselman has been successfully investing in real estate since 1996. He has completed over 1200 real estate deals, owned a construction company, been a private lender, and owned a property management company. Peter currently works with clients all over the US helping them achieve riches in real estate investing. For more information please visit www.CoachingByPeter.com.
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Historically, simultaneous closings were a great way for real estate investors, buyers and sellers to all get their “piece of the pie” very quickly in a real estate flip. Simultaneous closings occur when a seller signs a contract selling the property to a real estate investor. This contract is put into the hands of a closing attorney. At the same time, the investor signs a contract selling the property to a third party buyer, contingent on that buyer’s ability to fund the transaction.
Now that you understand how transactional funding works, it probably has taken a pretty big load off your mind. Turns out, despite the new laws that require your name to be on the deed of a property that you sell, you can still get funding that is not a risk to you or the lender without having to have perfect credit and a huge down payment on the property.
Whether you have done short sales in the past, or you have educated yourself about these transactions, you are probably fairly familiar with the basic function of the real estate deal. Essentially, the owner of the home gives a third party the right to the deed of the home and to negotiate with the bank for a discounted price on the home in exchange for avoiding a foreclosure.
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