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HARD MONEY LOANS COMPARED TO TRANSACTIONAL FUNDING
In this video I talk about the differences between a hard money loan from a hard money lender or private lender versus transactional funding which is used for a double closing.
I have found that most new investors have a hard time understanding the difference between hard money loans and transactional funding, so I created this video (originally for my students) to explain the differences.
The key thing to understand is that hard money, and hard money loans (or loans from private lenders) have absolutely nothing to do with transactional funding (for wholesalers).
Transactional funding is used by wholesalers to fund a double closing (instead of assigning the contract). Transactional funding is utilized when a double closing is necessary and a contract cannot be assigned (like with many bank owned REO’s and short sales). The funding has to be on the same day and is usually at the same title company. It’s called a double closing because both closings happen on the same day. Double closings are also known as simultaneous closings.
In order for the transaction to be legal, the buyer (wholesaler) that is buying the house, has to pay for the house before they can sell it. If the buyer has the funds available then they will use their own funds. If they do not have the funds available then they will use a hard money lender or private lender. And that is where private lenders that offer transactional funding step in. I offer transactional funding to all of our Partnership Program Students (that partner with us on deals) and I personally fund these deals for free (if they meet certain parameters explained in the video). We do not fund any deals that are not within the parameters of our Partnership Program (for legal and other reasons). We fund all of our Partnership Program deals in the State of Florida and use the same title company for all of these transactions. For our students that are outside of Florida, we tap into a network of private lenders that offer transactional funding.
So that is how transactional funding works.
Just remember this:
TRANSACTIONAL FUNDING = FUNDING FOR WHOLESALERS
HARD MONEY LOANS
A hard money loan, is when you borrow money from a hard money lender (or a private lender) for the purpose of buying, fixing and flipping a house. Your goal with a hard money loan is to pay back the loan as soon as possible. Hard money loans usually have a loan term for a period of no longer than 12 months. Most rehabbers can buy, fix and flip a house in less than six months so the 12 month loan term should not be an issue if you are a rehabber (person who fixes and flips properties).
Private lenders (like me) can lend their own money (which I do with my students), and are secured by having a mortgage and note on the property. What that means is that if you don’t pay the lender, they can get your house. A hard money loan works exactly the same as a loan that you may have on your own house (if you own a home).
However there are some key differences:
1. You cannot live in the house if you are borrowing hard money. These loans are for investors only and for investment purposes (like buying, fixing and flipping).
2. You cannot own the property in your own name. Typically most investors own properties in LLC’s but you can consult with your attorney about the best legal structure.
3. The interest rates are very high compared to typical loans. They are mean to be short term bridge loans to offer you gap financing to complete the project. Once the property has been rehabbed, you can either sell the property and pay off the loan or you can refinance the loan and get a conventional loan (if you are keeping the property as a rental).
4. Most traditional lenders will loan up to a maximum of 70% LTV (loan to value). that is lower than a conventional loan where you can get cheap financing with as little as 5% down.
In the past few years, there have been a number of private equity companies and banks that have entered the hard money lending business. Since the market has been going up for the past 10 years, many of these large institutional lenders view fix and flip loans as relatively safe (they are in my opinion). Many of these lenders are now offering very competitive loans and competing with the older more traditional hard money lenders. Some of these lenders will loan up to 90% of the purchase price and will also loan the rehab money (in incremental draws).
It’s a good time to be buying, fixing and flipping houses. Prices are going up and lenders are willing to lend. If you are not already fixing and flipping you should start doing so. Establish a relationship with a lender (or lenders) so that you can start fixing and flipping houses. There is a lot of profit to be made. There is also a lot of profit to be made for the lenders too.
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