When you’re an investor, you want as many tools as you can possibly have because it gives you more options. We do offer transactional financing in the “Six Month Mentor Program” and it can be a phenomenal thing in the right situations. I’ll explain what transactional financing is and how it works.
“I understand that you’re now doing transactional financing on real estate deals for people who partner and mentor with you. Can you explain how that works?” – Eddie Jamison from New Haven, Connecticut
First of all, what transactional financing is not. There are a lot of real estate investing teachers that are talking about this on the internet right now and making offers, so there’s a lot of hype surrounding this concept and what it can do, but there’s not a lot of information about what it can’t do. So let me get into that with you here.
I am offering transactional financing to my mentor students. That means if you find a property you really want to buy that’s really dramatically under market value. You know, you can turn around and flip and make a chunk of money on, but you don’t have enough money to do it.
What it’s not, it’s not hard money loans, I’m not a lender – I’m not loaning this money to you. Transactional financing is where you identify the property and you need a letter of credit on that property or to prove that you have funds.
I provide that proof of funds, so that you can give that to a bank or an REO or an individual who’s selling that property so that you can prove that you have the money to close the deal. Then, you can go out there and find yourself a new buyer for that property at a higher price and we have two closings.
Essentially, when that person is ready to close, the same day, I come in with the cash, close the deal, and then we go right next door and go to the next closing and the new buyer brings in his money for the loan and pays off that transactional financing. So, it made it possible for you to get the proof of funds, buy the property for cash and to turn around and sell it to a new buyer.
It’s really fantastic, and in theory, it’s very exciting. There’s a lot of hype around this. There are some things that you need to watch out for, and there are also two ways to do this without using transactional funds. Transactional funds are expensive. On hard money loans, you’re going to pay 10 points plus 18% interest on these things.
On transactional financing, you’re going to pay ten points as well. A point, by the way, is 1% of the loan amount, so if it’s $100,000, you’re paying $10,000 for this money, so you have to buy it dramatically under market value – we’re looking at 40-50% under market value, which right now in this market isn’t that difficult to find (there are a lot of great deals out there).
Then, you can turn around and sell it for 80% of market value, still give the buyer a great deal and make $20,000-$50,000 yourself, and in higher end markets, even more than that. So there’s some really interesting things going on with this type of financing right now, and it’s very sexy.
Now, there are different ways to do it using this transactional financing. You can do it with a simultaneous closing. Simultaneous closings are essentially the same thing except that the title company is willing to use the money that’s coming in from the second transaction to pay off the first. I’ve done these many, many times. It’s become a little more difficult to do them these days than it was in the past, so that’s one of the reasons transactional financing would come in handy in certain cases.
The other way to do this is through an option, and I’ve done options on hundreds and hundreds of properties. It’s one of the main structures that I teach. I did it with a bunch of new construction just in the past few years. It’s not a viable technique for new construction right now because of the cost of new construction, but when we were doing it, essentially what I would do is go in and make an option on an entire subdivision from a new builder.
I would make the option at a specific price then I would go and turn it around and sell it to my list still at a discount, but for a little bit higher money. And then, when they closed the deal, I would get the difference between the purchase price and the option price and I would make money that way.
You don’t have to have transactional financing to do it, but there are some situations that require you to show a letter of credit. I had a relationship with those builders so it made it easier for me to do an option and I could work with them. You’re not going to have that all the time if you do it with REO’s.
Here’s another problem with transactional financing: if you go in and buy a property that’s listed on the MLS as an REO, and let’s say it’s listed for $100,000 and it’s worth $180,000 – you can go in there and buy it for $180,000.
You have a buyer who’s going to give you $150,000 for the property, so you plan on using transactional financing, show them my letter of credit or your proof of funds to show them that we have the cash and can close this deal. Then we find another buyer and they say, ‘Yes, I’ll pay you another $150,000.’
Then, he goes out and tries to get a loan to do that and the lender’s appraiser looks at the MLS and says, ‘No, this properties being sold for $100,000 right now. We can’t appraise it for $150,000 even though its value may truly be at $150,000.’
So, the lender won’t give the loan. Now if the buyer’s a cash buyer, then that’s not a problem at all, but if they’re using a new loan, then it could be problematic. I’m not saying that’s going to happen every time, but it could happen sometimes, so it’s something to be aware of. Same with options.
So, whenever you’re dealing with a lender and you have a property listed at a specific price in the MLS (the multiple listing service) that an appraiser has access to, then it can be a problem selling it for dramatically more and getting it appraised for that amount.
Even though the value is there because they’re seeing another person buy it for so much less money and taking a big killing at that. They feel like they’re taking a bigger risk because they’re taking that at a higher price.
That’s the reason transactional financing is going to work best on private individuals.
I have lots of ways to find great deals on properties from private individuals using our expired campaign, our absentee landlord campaign, and the standard stuff that we use with signs.
The FSBO campaigns that we do to find properties that are dramatically under market value from individuals (rather than the MLS) can make it so the appraiser won’t go to the MLS and see that property in the MLS for dramatically less money because you’re working with a private individual.
I give those tools to people that are my partners. Those partners are the people that are in my “Six Month Mentor Program”.
So, if you’re interested in getting involved in it, you ought to take a second look at the Mentor Program.