Transactional Funding

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Transactional Funding

Seasoned and experienced real estate wholesalers know how to find deep discount properties and put them under contract, but sometimes lack the 100% cash needed to successfully pull it off. To answer this dilemma, historically, wholesalers assigned (sold) the contract, during the escrow contingency period (usually 12-17 days or so), to a ready-to-go cash buyer. Result: The wholesaler can do a deal with hardly any out-of-pocket money outlay on their part. However, over the past few years, due to the short period of time involved, as well as certain regulatory issues in some states, as well as some new state laws, combined with changes in some real estate industry practices (title company resistance to same-day, back-to-back closes, for example), successfully assigning a property during the contingency period has proven increasingly problematic for many if not most wholesalers.

 

Plan B for some wholesalers is to use Transactional Funding (TF) facilitators, employing what is known as double (or back-to-back) escrows. Conventional TFs are still out there, ready to do deals that fit their unique funding profile. However, most of them:

 

A. Are not 100% nationwide. They do not do TF deals in all 50 states and DC, and/or they

B. Will not do deals with properties that have clouded title issues, and/or they

C. Refrain from doing deals for small amounts of money, i.e. say $20,000.

 

Also, to reiterate, many if not most title companies will not facilitate same day, double closes.

 

In answer to these unmet needs, there is what is known as Slow Motion Transactional Funding (SMTF). This is for short term wholesale contract flips where the funding requestor (wholesaler) has the whole deal lined up and ready to go, but lacks the cash to pay off the seller. Or they cannot get both deals closed the same day. Another reason that wholesalers use SMTF is because many county recorder’s offices are taking a long time to record deeds, which makes same day double title recordings more and more difficult.

 

The good news is, if the deal is right, the wholesaler has up to 30 days to get both escrows closed, if they use SMTF; this is usually plenty of time to get back-to-back closes accomplished, in most cases.

 

SMTF Caveats

 

1. They are usually First Position Funding only

2. Make SURE you are dealing with investor-friendly RESPA vendors, i.e. escrow and title people who have long experience with double close deals and how they function.

3. LTV (Loan to Value) to current, as is FMV (Fair Market Value) usually has to be 60% or less

 

How about properties where the LTV to FMV is above 60%?

 

Alternative capital options to consider for short term needs, above 60% can include:

 

a. Seller financing

b. Your own funds (401k or IRA loans for example; HELOCs are another option)

c. Secure a temporary loan from a private funding source (friend, relative, neighbor, co-worker)

 

NOTE: Whichever alternative funding provider you use (for temporary funding above 60% LTV/FMV) they must be prepared to take second position with their note. However, this is usually only for a short time—typically one month or less. As soon as the SMTF is paid off, the holder of the second position note automatically assumes first position.

 

With Transactional Funding:

 

A. There are three separate parties involved in TF deals:

 

1. A, Seller

2. B, Wholesaler, etc.

3. C, Source of the exit strategy money (Cash Buyer, Co-wholesaler, investor)

 

B. There are two separate escrows/closings:

 

1. A to B

2. B to C

 

C. The normal sequence of events is as follows for a TF:

 

1. C puts their money into the BC escrow

2. B puts their money into the AB escrow

3. AB escrow closes

4. BC escrow closes

5. Final docs are sent out to all parties

 

D. The wholesaler has up to 30 days to get both escrows closed, though most TFs are completed in a matter of days or a week or two.

 

E. The wholesaler (investor) must have exit-strategy money already lined up:

 

1. Cash buyer: Make absolutely certain they have the cash in the bank and are ready to fund when it is time for them to bring their money to the table to fund the BC escrow.

 

2. Borrowed funds: Confirm that the lender (hard money, commercial broker, private lender) is prepared now to provide the following:

 

a. LOC (Letter of Commitment). Sorry, but a POF (Proof Of Funds) or a CLOC (Conditional Letter of Commitment) or LOI (Letter of Intent) or some other half-measure document will not suffice. You need to know, with total certainty, that they are ready to step up to and fund the deal right now, not weeks in the future.

 

b. Written assurance that they are OK sending the loan proceeds to the escrow company/closing attorney when requested to do so. See below.

 

c. Included in the LOC must be their commitment to, and written acknowledgement that:

 

* They have completed (and approved) all needed and necessary due diligence and vetting on their end by their underwriters;

 

* Their loan committee (or CEO, or? etc.) has approved the loan request, i.e. they have already approved a finished appraisal or are OK with a BPO, etc.

 

To reiterate, they are aware that they are required to wire the funds to the BC escrow when instructed to do so.

 

3. Run all of the above past the lender (loan officer) so there are no last- minute surprises.

 

4. In order to bring crystal clear clarity to the issue of the LOC, feel free to send them this article in order to ensure that everyone, including the lender, is on the same page.

 

5. To summarize, the lender must provide a LOC that includes verbiage which acknowledges they have approved the loan, and are prepared to wire the requested funds into the BC escrow first, to jump start the process.

 

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