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?

[Jay Hinrichs]

@John Thedford  its a niche and actually I dont'  do it in the sense your probably thinking about it.. IE putting up cash for one or two days.. and making a small fee that is a sky high % rate..

there are others on BP I saw did this but don't see them posting anymore.. there was a lady in St. Louis

[Wayne Brooks]

Fake transactions/title co.s.

[John Thedford]

Originally posted by @Wayne Brooks:

Fake transactions/title co.s.

 Explain please?

[Kevin Romines]

Sean Terry has a company that does transactional funding. Sean and his crew are very transparent. They would be happy to talk to you about this. go to his site, www.flip2freedom.com and contact them from there. 

[Jonathan R McLaughlin]

Unfamiliar with the term as well, would love to know it @Jay Hinrichs do you mean overnight loans etc?

At the risk of being embarrassing, Jay, huge fan of your posts and generous spirit and have learned a lot from you, thank you.

[Jonathan R McLaughlin]

Unfamiliar with the practicalities of the term as well, would love to know  @Jay Hinrichs do you mean overnight loans etc?

At the risk of being embarrassing, Jay, huge fan of your posts and generous spirit and have learned a lot from you, thank you.

[Wayne Brooks]

@John Thedford  I've heard of transactional lenders being approached for funding where there really was no transaction (no seller, no end buyer with the cash).  Not sure how they were going to skip with the money and not get caught, but apparently they are trying.  Obviously using a title co. you know/trust would avoid this.  I also assume ALL title co.s accept only wire transfers, as opposed to certified checks which could be fake, from the end buyers but I'd verify so your money doesn't go to the seller then find out the buyer's funds are no good.

[Tom Gimer]

Zero risk if you know and trust the title company/attorney and all parties in both transactions are fully committed.

Money never leaves escrow.

Problems arise when transaction 2 has issues and that possibility has not been properly addressed in advance. 

[Jay Hinrichs]

@Jonathan R McLaughlin   you have house you want to double escrow...  title company or closing attorney is actually following respa and not violating it.. using As funds to close the Cside and giving B the middle man profit is a respa violation. so many closer simply wont do it this spawned out of the GFC.

so that created a niche for transactional fudning and what these guys do.. is they will put the funds into your escrow so that  those funds are used to close the deal they get paid back the same day and they take a small fee for this usually 500 to 1000 bucks.. so not bad you put out 100k in the morning and get 101k back in the afternoon.. Apr through the roof..

Although the few times I did this the C side closed but A did not and now I am stuck in a loan I did not want in the first place  LOL.. so I don't do it.. rate of return is great but to go to all the effort to make 500 or 1000 bucks in a day is simply not worth the risk of having 100k tied up longer than anticipated plus the time it takes to do the wire and makes sure its all ok etc.. just not something I want to do.

but for those that have scaled it and have deal flow and are doing a bunch each week I can see that being quite lucrative and fun for them..

[John Thedford]

Originally posted by @Jay Hinrichs:

@Jonathan R McLaughlin   you have house you want to double escrow...  title company or closing attorney is actually following respa and not violating it.. using As funds to close the Cside and giving B the middle man profit is a respa violation. so many closer simply wont do it this spawned out of the GFC.

so that created a niche for transactional fudning and what these guys do.. is they will put the funds into your escrow so that  those funds are used to close the deal they get paid back the same day and they take a small fee for this usually 500 to 1000 bucks.. so not bad you put out 100k in the morning and get 101k back in the afternoon.. Apr through the roof..

Although the few times I did this the C side closed but A did not and now I am stuck in a loan I did not want in the first place  LOL.. so I don't do it.. rate of return is great but to go to all the effort to make 500 or 1000 bucks in a day is simply not worth the risk of having 100k tied up longer than anticipated plus the time it takes to do the wire and makes sure its all ok etc.. just not something I want to do.

but for those that have scaled it and have deal flow and are doing a bunch each week I can see that being quite lucrative and fun for them..

 Thanks Jay. That was my concern. Getting stuck in a deal I didn't want. Already did that once:)

[Jay Hinrichs]

Originally posted by @John Thedford:

Originally posted by @Jay Hinrichs:

@Jonathan R McLaughlin   you have house you want to double escrow...  title company or closing attorney is actually following respa and not violating it.. using As funds to close the Cside and giving B the middle man profit is a respa violation. so many closer simply wont do it this spawned out of the GFC.

so that created a niche for transactional fudning and what these guys do.. is they will put the funds into your escrow so that  those funds are used to close the deal they get paid back the same day and they take a small fee for this usually 500 to 1000 bucks.. so not bad you put out 100k in the morning and get 101k back in the afternoon.. Apr through the roof..

Although the few times I did this the C side closed but A did not and now I am stuck in a loan I did not want in the first place  LOL.. so I don't do it.. rate of return is great but to go to all the effort to make 500 or 1000 bucks in a day is simply not worth the risk of having 100k tied up longer than anticipated plus the time it takes to do the wire and makes sure its all ok etc.. just not something I want to do.

but for those that have scaled it and have deal flow and are doing a bunch each week I can see that being quite lucrative and fun for them..

 Thanks Jay. That was my concern. Getting stuck in a deal I didn't want. Already did that once:)

 To be fair and balanced I think the guys that really specialize in this don't get stuck often ... if at all.

I was just half assing it so it was my fault I got stuck.. but I did one that went say 30 days and I think it was about 70k I had in there and I charged them a overtime fee and made I think 6k on it.. not bad.. on an APR rate. They still made according to the hud 15k.. so it worked.

[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.

[Tom Gimer]

@Shari Peterson Interesting stuff for sure.

I would be interested in seeing how AB and BC closing in different offices is managed with A being the legal owner. To me having the same title company/closing attorney handle both is the safest ... provided you have a relationship. 

I've even suggested transactional funding to some HML we work with only because I know these transactions can be safely managed... but only when supervising both ends.

[Shari Peterson]

@Tom Gimer It is possible to have the AB close at one office and the BC close at another. I have done those myself. However, it is inherently riskier. The reason is that before BC can close, AB must close and record. AB can't record until it is in receipt of the funds. As the Transactional Funder (TFer), your funds are out and disbursed. Then, the TFer must simply rely upon and trust that BC will immediately close and record, following the AB closing/recording. There is no contract requiring the BC to do this, because they are not the one responsible for the AB closing/recording, and they won't go under contract for the behavior and actions of another title company. At the very least, a day or two (or more) may pass between the AB recording and the BC closing recording. To cover this time period, you need a deed of trust/mortgage to secure the collateral as well as hazard insurance.

If both AB and BC close with the same title company, you contractually bind the title company to not close and record the AB until the title company is in receipt of 100% of the funds required for BC to close and agree to close BC immediately after, on the same day as, the AB close. It is much neater and less risky.

[Eric M.]

@Shari Peterson knows exactly what she is talking about on this and her tips are spot on. I offered TF for a while and did about 20 deals but interest dried up for me. I didn't think these transactions happened that often anymore.

But the fraud possibilities was what really drove me away. At the end, I was getting offered 3 fraud deals for every legit one and it felt like I was constantly dodging bullets. I probably turned down several legit deals because I was getting paranoid.  

The caveat about Shari's advice is that some of it doesn't really apply to you.  Her saying she has not gotten scammed and has done a lot of deals sounds like the odds are very low. That is not exactly my experience. The odds are low for Shari because the scammers don't target the experienced lenders. She has a process and an infrastructure in place as a full timer that spots the problems. A part timer doesn't have that and the scammers know it. They target the new lenders, of which the OP just outed himself as possibly one. I assure you scammers read these posts and when someone comes on and announces they are a new lender they put a big target on their back for the scammers. The thieves will try over an over in different ways because it only takes one mistake to get $100 or 200K out of you. As a lender, you can make zero mistakes. As a scammer they can fail a hundred times and succeed once and come out way ahead.

The number one red flag for me was people calling saying they needed to put together deals in a few days. But I also saw fake buyers, fake title companies, etc.  TBH, if I was going to be a criminal, this is what I would do. Try to trick small private lenders to wire money for large transactions to fake accounts.

[Shari Peterson]

@Eric M. thanks for the kind words. I see you are in Chicago. I believe you that 3 out of 4 deals you were presented with were scams. That is also my exact experience for deals coming out of Chicago. There is an interconnected group of players there, and I bet you and I  have come across the same names.

[Tom Gimer]

@Shari Peterson I'd rather oversee and control everything and record back to back. It eliminates the need for a note/deed of trust, which takes this outside of what I consider TF.

I can't imagine offering TF to borrowers with whom I did not have an existing relationship. That's lending to people with no money and no background.

[Shari Peterson]

@Tom Gimer I agree. You are in the ideal position as operating the title company, so you KNOW that all will go exactly as it should!