Going Into Transactional Lending, Any Advice?

Question

I have some money coming in and would like to be a transactional funder. Do you have any advice? How do I ensure the money is lent out every month? How do I compete with a plethora of transactional funders out there? What are the watch outs? How do I ensure the money is safe (say when the deal does not close)?

Thanks in advance for your help!

Ann Bellamy · Answer

Answers in the order you asked them. 
1.  Market, market, market
2.  Focus on local transactions and build relationships with investors who need you.  
3.  Make sure the end B-C transaction is cleared to close and funds at the closing company before your closing company releases funds on the A-B transaction.  To do this, you need a closing attorney/title company who regularly handles this type of transaction, not just one who says they can do it.
4.  See 3 above.

Now that I've answered your questions, to my mind, the bigger issue is the reduction in the number of transactions that can qualify for transactional funding.

Since title companies will not (knowingly) issue title insurance on short sale transactions that are transferred immediately to another C buyer, and transactional funding used to be used mainly for short sales, the quantity of deals available has decreased substantially.  the exception to this is if the Shorting lender for A signs off on the B-C HUD, thereby proving full disclosure.

I realize some are still doing simultaneous closings and will dispute this, and some are saying that you can still do a transactional funding deal on a short sale, and that some attorneys are still doing them.  However, I have had two sets of my attorneys have this discussion with the General Counsel at the title companies.  None of the major title companies are knowingly allowing immediate transfer of title at a profit without full disclosure to the shorting bank.  Therefore I choose to follow my attorneys advice and not end up the subject of an investigation by the AG.  On short sales, we require disclosure or we don't do the deal.

In addition, deed restrictions by the REO lenders have reduced those flips as well.

So my advice would be:  
1.  either find a hard money lender or broker and have them find you hard money deals, or 
2. find a fund that invests in real estate investments or
3.  find a fund that lends money or 
4.  Take the time to educate yourself and do it yourself.  This is a long process, I have continued to make mistakes since I started lending, and each mistake refines my lending criteria.

Eric M. · Answer

Hey Wendell,

If you are going to do longer term trans funding....which isn't really trans funding but short term hard money...then there are certain things to consider.  It is a tough biz but there is demand for it.

If you are planning to do same day deals, I wonder why everyone thinks this is a hot "new" market to get into.  You simply will not be able to find enough deals to keep money invested.  For me, it is just an occasional deal to complement other business, nothing that can be counted on as a revenue stream of its own.  I just had a small one man shop and did no advertising but I used to keep nearly a million dollars set aside just to be available for trans deals.  I could turn the whole amount weekly.  Now I keep none aside because it can be invested other places much more profitably because I can't even turn it once monthly. (still do no advertising...maybe THAT is the problem!)  When a deal comes along if I have the funds available, I do it.  Otherwise, I ignore this aspect of my business.  Miss a few now and then but not enough to worry about.  The heyday of same day trans funding deals is nearly 2 years in the rear view mirror and it is way too niche now, IMO.

If you do put yourself out there as a trans lender, you will find a lot of people trying to separate you from your money.  You will get fake deals proposed.  You will run into faked title companies.  There are people here on BP who read posts from "newbie " lenders and specifically target them for scams since they are the easiest prey.  The people in the business a few years won't get scammed but people come on BP and announce to the world that they are new and don't know what to look for.  They are sitting ducks.  Many borrowers will approach you with "unusual" deals that they want you to bend your rules a bit for.  They will dangle the prospect of lots of future deals in front of you if you just do this one weird thing.  Don't do it.  The one deal you bend your rules on and get taken will be years worth of profits down the drain.

Just be wary.  Check out ALL the details of every deal and follow your procedures.

Jon Gorosh · Answer

Wendell,

I would suggest investing with existing Transactional Lenders as their OPM (Other People's Money) funding source till you get some experience.

It is vital to work with an experienced team of attorney/title company that know how to conduct a double closing and follow your closing instructions to AVOID release of your funds in Transaction A before the monies from the end buyer of Transaction B is sitting in escrow at the Title company.  Always try to use the same closer at the same Title company to perform both transactions.

Wendell De Guzman · Answer

Thank you Ann Bellamy for your insights and suggestions.

Kenneth, I still do real estate deals. But lending on the side makes a lot of sense to me since I usually wholesale most of my deals anyway. I don't like renovating houses.

Ted Akers · Answer

I have to echo the post by Ann Bellamy, with emphasis on her item #3 and the fact that there are noticeably fewer same-day deals.  Most short sales are being approved with 30 day holds extended to a 90 day hold if the resale spread exceeds 20% (disregarding any funds spent on rehab).  There are still some same day deals, but the majority of the market has moved to either 35 or 95 day transactions.  Fees can be attractive on these 35-95 day transactions, but they are an entirely different risk profile.

Steve Babiak · Answer

Rich Weese has some advice on this; search for his posts, or maybe he'll chime in since I mentioned him here.

Kenneth Estes · Answer

This message carries a strong personal bias, so apologies in advance.

Why do you want to be a hard money lender?  You've got a lot of experience in real estate so you know how to evaluate a good deal and a bad deal.  Is it simply that you don't want to spend the time and energy to do the deal yourself?

Why wouldn't you just invest in a fund that buys and fixes up real estate?  Your experience will let you evaluate them quickly and then you can participate in the upside as well as your APR.

My bias comes from the fact that I run just such a fund.

Going Into Transactional Lending, Any Advice?

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