There are two ways of looking at transactional funding in terms of being a loan or not.
First, many closing agents are emphatic that transactional funding is a loan and they actually require a lender’s title policy in addition to the regular owner’s title policy.
The cost of this additional policy is usually $25 depending on the price of the property’s buyer’s policy.
If a conventional or hard money lender was funding a purchase, they always require a lender’s policy which additionally insures the amount loaned for about 10% over the actual amount loaned.
But to get a lender’s policy, the closing agent and the title insurer will require a mortgage and note that must be recorded in the public record.
The cost to generate these documents and officially record them can get expensive very quickly.
Ideally, the transactional funder doesn’t want the investor to incur additional costs to use his services, especially since he isn’t getting any benefit from the recorded documents.
If the closing agent understands the double closing process and does exactly as the transactional lender has requested, there would be no need for a note and mortgage on the property.
The risk to the transactional funder comes if the end-buyer doesn’t close on the same day or at all and simply walks away from the B-C leg before it closes.
The transactional funder has now funded 100% of the purchase price for the investor and “technically” has no collateral for his funds.
The investor can resell the property and his cost basis would only be the amount of his EMD – if he even put one up.
There are legal remedies for this situation and the transactional funder will have to go the route of suing the investor to recover whatever funds he can.
This is the reason why “extended fundings”, where the A-B and B-C don’t happen on the same day becomes difficult to find lenders to take a chance, even with a note and mortgage in place at the A-B closing.
If you have any additional questions, contact me directly at [email protected].
If you need hard money instead of transactional funding, contact me for referrals to private hard money lenders.
Be sure to check out BestTransactionalFunding.com for all your same-day double closing needs, including a list of Investor-Friendly Closing Agents in various states.
We have more five-star Google ratings than all the other transactional funders combined.
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