Intense regulatory scrutiny has prohibited the practice of back-to-back closings that allowed investors to close both property purchase and resale transactions simultaneously using the resale funding to purchase the property from the original seller. This simultaneous closing, called “flipping,” allowed the middle buyer/investor to serve as an intermediary who simply cashed in on the price difference between the original purchase price and the resale price without any personal funding involved in the transactions.
Now, however, the new regulations require that the “middleman” investors use their own funding to close the purchase of property involved in double closings. This has increased demand for funding at the time when credit has become difficult to obtain and, in turn, has prompted many investors to seek alternative funding sources to finance their short sales.
A quick and fairly simple solution available to investors in these deals is transactional (or transitional) funding. Many lenders have entered this lucrative lending segment because of the extremely short duration of loans and relatively low risk. The use of transactional funding, usually private cash, allows the investor to bridge the financing gap so that transactions involving a simultaneous purchase and resale of a home can take place.
The transactional loan gives the investor flipping short sale properties access to money in order to close the home purchase transaction (the first transaction) when the original homeowner is ready to sell and the resale transaction (the second transaction) when the end buyer is ready to take over the property.
These two separate transactions involved in a double closing take place back-to-back within a few hours. Once the two transactions are completed, the funds are available to the short seller to repay the transactional loan. The funds to repay the loan come from either conventional mortgage loans or cash. In general, only loans from Federal Housing Authority (FHA), which have a seasoning requirement, cannot be used to finance these double closings.
It is also relevant to note that in double closings a certain financial statement is required to prove that the short-sale investor has sufficient funds available to close the first transaction (the purchase of home). In that case a proof of financing letter, issued by a bank or some other depository or custodial institution, can be used to document the availability of funds needed to complete the purchase transaction. However, most transactional loan lenders secure these letters for investors on the day of closing.
Lenders of transactional loans make their funding available for back-to-back closings of short sales for commissions that are somewhat higher than those paid for conventional short-term loans. These fees usually involve a small fixed fee for small funding amounts or variable (%) fees that are usually set at about 3 percent. However, the main advantage of these loans is their simplicity, given they do not carry any application fees, out-of-pocket fees, credit or other pre-approval requirements.
In today’s market, opportunities for flipping properties, especially those involving foreclosed properties, are abundant but possibilities to execute deals are limited because of tight credit conditions. In this environment, transactional funding proves to be the most convenient source of finance to purchase and sell distressed properties for a quick profit.