Transactional Funding? The Pitfalls? How Could I Get Hurt

[John Thedford]

I just had someone ask me about transactional funding. This is not my typical M/O and am curious how I could get hurt offering that service.
@Jay Hinrichs and other pros?

[Shari Peterson]

@Jay Hinrichs -- that would be me -- the lady in St. Louis. I've focused on providing transactional funding for nearly 9 years now, after years as a real estate investor.

@John Thedford -- I've never gotten burned but have come close a few times. Red flags caused me to pull the plug before the deal actually happened.

Here are some things to keep an eye out for:

• Extremely short turn around (like 1-3 days) from when they contact you and when they want to close. This usually means someone else vetted the deal and rejected it.
• Make sure the title company at which both the AB and BC is closing is legitimate. Ask for their license number and the state in which they are registered. Ask which companies underwrite their deals, e.g. First American Title, Fidelity, Stewart, Chicago, etc. Then check those underwriters to see if indeed they are a recognized agent for those insurance companies.
• Google Maps is your friend. Put in the address of the title company and bank they have for their wire instructions. Does their office exist? If it is an office building, find the management company for that building and ask if they show that title company as a tenant. I've caught fake title companies this way.
• Beware of deals where they don't want to put title insurance on the AB. This is a way to not reveal that they have no official capabilities as an agent for an official title insurer.
• Ask if there is a relationship between the B Buyer and C Buyer. Is it an arms-length transaction? If they say no, then do some simple checks with both signer's names and company names. I've found B and C buyers who supposedly didn't know each other yet are friends on Facebook, or are members of the same LLC.
• Watch out for deals wherein the exit strategy is a re-fi to a larger loan. For example, the B Buyer is buying a deal for $100,000 and then is going to immediately re-fi into a loan for $150,000 with a hard money lender. I've closed some of these deals that are legit, but only after checking to see if the exit lender is aware of the nature of the transaction and is comfortable with loaning the $150,000 on that property. Otherwise, the B Buyer could conceivably close on the AB and re-fi on the BC, get the extra $50k under their bogus LLC, and walk away from the property and loan.
• Verify that 100% of the C Buyers funds have been received in escrow of the title company. I've been fed a string of numbers in an email that is supposed confirmation of receipt of funds, when it really is just gibberish.
• Beware of having an attorney as the closing agent that is holding escrow for both sides. I realize there are attorney cities/states, which require that an attorney handle the closing. If possible, protect yourself by asking that the escrow for AB and BC be held by the title company underwriting the deal. If that isn't possible for whatever reason, do a deep check on the attorney. Is his/her license active and in good standing? Are there any disputes involving the attorney with their state bar association? Do they have a website?

These are just a few of the things to look out for. As with doing a Hard Money loan, you need to do your due diligence to protect yourself and your funds.