All About Transactional Funding for Real Estate Short Sale Flips

Investors who work in the short sale arena understand the importance of financing. Without financing or funding, deals simply do not happen. While the parameters to how a short sale deal can be structured are nearly infinite, some basic principles around funding still apply. You should have a basic knowledge on both transactional funding as well as the proof of funds letter.

Transactional Funding

Transactional funding, quite simply, is a one-day "bridge loan", (also called "flash cash") to support the purchase of a property where there is already a buyer waiting for it. It's an A-B, B-C type of transaction, where the investor is "B", the end buyer is "C",and the seller is "A". The investor or transaction coordinator simply uses the money as a "bridge".

Let's walk through a typical scenario. Bank of America agrees to short sale a property for $200,000. You find a buyer for $240,000. You coordinate so that you purchase the house on a particular day, and also sell it to the buyer on the same day. Your "take" is generally the difference between the sales price and the buyer's price, in this case $40,000. Of course, this is very simplified - as there are realtor commissions, closing costs, and so on that impact the final number - but for the sake of demonstration it should suffice.

The benefits of utilizing transactional financing include:

1. No holding costs by hanging on to the property
2. Quick transaction turnaround
3. Ability to flip short sale properties that you didn't have the money to do otherwise

The downsides include:

1. Cost - many transactional lenders charge anywhere from 2-4 points, and sometimes more - make sure to include these when you calculate your margins
2. Paperwork and Legalese - make sure you do your due diligence - some states will not allow back-to-back closings, and in other states deals must be structured the right way to make it legal. Also, each lender has unique requirements - some lenders have 90 -day seasoning requirements which must be met, so back-to-back closings are not possible.

As an investor, you need to make a decision on your strategy for a given property and take all the posotives and negatives into consideration. Transactional funding can be a useful tool for other types of deals besides short sales, including REO (real estate owned) and any other transaction based around a double-close.

Other notes: your purchase offer will likely need to be in the name of an entity (like an LLC or a corporation), the closings will both need to occur at the same title company (make sure you find a title company familiar with double closings!)

Proof of Funds Letter

The proof of funds letter is nothing more than a document demonstrating that all the parties involved in a real estate transaction actually have the ability to complete that transaction successfully. The proof of funds letter is provided by the transactional financing company once they approve your application.

Using the proof of funds letter, the buyer/investor is able to secure any necessary additional funding or to assure the seller that they have the means to fund the real estate purchase.

To achieve success in real estate short sale investment, you need to understand the options available and how to use them. Transactional funding and the proof of funds letters are two great tools available to help you grow your business and be flexible in any situation you find yourself in.

Have you had any experienced with transactional funding or a proof of funds letter? We'd love to hear about it in the comments! We'll be covering real estate and short sale financing more in the future, stay tuned for an article on Hard Money Lending!

Looking for Short Sale Software? Visit Short Sale Artisan today!