Let’s assign names to the players and create a role play.
Lender: Mr. Scott
Seller: Angela
Buyer: Dwight
Real estate investor: Jim
After finishing his ham sandwich for lunch, Jim gets a phone call from Dwight. Dwight recently sold his beat farm and wants to move closer to his company in Scranton, New York. He’s looking for a single story home for around $125K to $150K. Jim tells Dwight he’ll call him back.
Jim starts going over his notes. He suddenly realizes Angela is selling a house that fits Dwight’s needs. She is selling her property for $100K. Jim is excited. Jim calls Dwight back and tells him of the good news. Dwight visits the home and tells Jim he wants it. Jim is elated! Jim tells Dwight he can sell the home for $125,000.
Jim is excited. However, he doesn’t have enough funding to purchase Angela’s house. Jim goes home and starts talking to his wife Pam. Pam can see Jim’s disappointment. This would be an excellent opportunity for them to make some extra cash, especially since they recently had their first child together.
After a few moments of dwelling on the matter, Pam’s eyes burst with thought. She remembers hearing about transactional funding from her coworker Andy. Pam tells Jim to look into transactional funding. Jim kisses Pam and thanks her dearly. He runs to the computer and begins searching for lenders offering transactional funding.
He calls several companies and tells them of his dilemma. Angela has a house for sale that Dwight wants to buy. Essentially, Jim wants to buy the house from Angela and sell it directly to Dwight for a profit. He simply needs the initial investment of $100K to purchase the property from Angela.
Over the course of 10 phone calls, Jim learns that he’ll need to fill out an application along with other documents. The majority of the lenders want four items submitted with the application: a contract between the seller and investor, a contract between the investor and end-buyer, a letter of approval for end-buyer, and possibly an acceptance letter for a short sale. He goes to work on collecting the information. After a few hours, he’s obtained the necessary information from Angela and Dwight, and also filled out 5 applications.
Sleeping is difficult that night. All Jim needs is a temporary loan for $100K. He’ll get the short loan, buy the house from Angela for $100K, sell the house to Dwight for $125K, pay the lending company 3% to 5% on the borrowed $100K, so he’ll end up giving them $103K to $105K back, thus, leaving him a profit of $20K. During the few moments of sleep, Jim dreams of working with a whacky boss in an office that distributes paper supplies.
Jim is sipping his morning cup of coffee reading the “Wall Street Journal” when the phone rings. Mr. Scott, a lender from Dundee Transactional Funds, tells Jim that his application was approved and his company requires a 4% return. Jim bursts with excitement. Mr. Scott tells Jim that the loan is a short-term loan good until the end of the day. That’s what she said, Jim’s wife Pam.
Jim buys the house from Angela, sells it to Dwight, and returns the loan plus interest to Mr. Scott. He deposits his profits of $21K into his bank. He heads home to thank his wife. Without the transactional funding, Jim would not have been able to do the deal.
Have you had any experience with transactional funding?
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