the secrets of transactional funding lenders focus more on the property value and less on the...

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Beacon Property Solutions® Email: [email protected]

Web: nashvillebeaconpropertysolutions.com

The Secrets of Transactional

Funding

A Guide for

Wholesalers and Private Lenders

Rudolph Francis

mailto:[email protected]

http://nashvillebeaconpropertysolutions.com/




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Table of Contents Chapter 1 - Hard Money and Transactional Funding .................................................................................. 4

What Is a Hard Money Loan? .................................................................................................................... 4

Who Uses Hard Money Loans? ................................................................................................................. 5

What Is Transactional Funding? ................................................................................................................ 5

Are Hard Money Lenders Regulated? ....................................................................................................... 6

Chapter 2 - Weighing the Risks and Benefits of Hard Money Loans to the Borrower ............................... 8

Chapter 3 - What Is Required for a Borrower to Get Hard Money? ........................................................ 11

What You May Need to Qualify for a Hard Money Loan ........................................................................ 11

Closing Costs on Hard Money Loans ....................................................................................................... 12

Examples of Hard Money Loan Terms .................................................................................................... 13

Chapter 4 - How Private Investors Can Make Money from Hard Money Loans and Transactional

Funding ....................................................................................................................................................... 14

How Much Money Does a Private Money Lender Need to Start? .......................................................... 14

10 Reasons Investors Should Consider Private Lending ......................................................................... 15

Chapter 5 - How to Write Hard Money Loans ........................................................................................... 16

Typical Borrowers ................................................................................................................................... 16

How to Protect Your Hard Money Investments ...................................................................................... 17

How to Get Your Money Out Early ......................................................................................................... 19

Chapter 6 - Transactional Funding: The Way to Make Your Money Work for You ................................. 20

Is There Really a Market for Transactional Funding?.............................................................................. 21

Chapter 7 - How to Write Loans for Transactional Funding ..................................................................... 23

Chapter 8 - Using a Self-Directed Retirement Account to Fund Loans ..................................................... 26

Self-Directed Retirement Accounts That Can Be Used ........................................................................... 26

Chapter 9 - How to Get Started as a Private Money Lender..................................................................... 28

Do You Want Income Now or Later? ...................................................................................................... 28

Do You Want Direct Involvement or Just Income? ................................................................................. 28

You Need to Protect Your Money ........................................................................................................... 29

How to Find a Borrower .......................................................................................................................... 31

Additional Resources .............................................................................................................................. 32






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DISCLAIMER

The author of this publication is not a licensed legal, tax, or financial consultant and thus, none of the

information contained herein should be construed as such advice. Nor does the author assume

responsibility for any errors or omissions. The author makes no warranties or guarantees, implied or

otherwise. It is the sole responsibility of the reader to verify any information contained herein. In

addition, the reader agrees that this eBook is for informational purposes only and is not intended to be

an offer or solicitation to buy or sell real estate, real property, or interests in such. The author(s) shall in

no event be liable for any financial loss or other damages resulting from the application of the

information contained herein. The contents of this publication are not intended to replace professional

legal advice.

No part of this book may be reproduced or transmitted in any form, electronic, printed, or otherwise,

without the express written permission of the author. All rights are reserved.

Published: January 2015






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Chapter 1: Hard Money and Transactional Funding

A vast majority of real estate transactions in Nashville, Tennessee require some sort of financing -

whether it is through conventional mortgages, hard money loans, or transactional funding. While most

people are familiar with conventional financing available through banks and mortgage companies, some

real estate investors are unfamiliar with other types of financing, including hard money loans and

transactional funding.

WHAT IS A HARD MONEY LOAN? A hard-money loan (HML) is a short-term, non-bank loan made by a company or private investor for the

purpose of purchasing real estate. The loan is secured or guaranteed by the property being purchased.

Think of a hard-money lender as a much more civilized version of a loan shark, but without the baseball

bat wielding enforcers. Since the loan is secured by the property being purchased, it is typically recorded

as a lien against the property.

COMMERCIAL HARD MONEY LENDERS Commercial hard-money lenders have the ability to finance larger transactions, as they are backed by

multiple investors and even retirement accounts. They in turn pay their investors 6 to 8 percent on the

money they receive from them. The hard money lenders make a profit from the points and interest paid

by the borrower.

These lenders frequently make loans in the millions to cover purchases and repositioning of large-scale

investors. Because of their almost endless financial resources, investors who complete 50 deals or more

annually turn to commercial hard-money lenders, rather than individual investors.

PRIVATE MONEY INVESTORS Private money lenders (PMLs), on the other hand, are individuals or small groups of investors that are

looking to invest their personal funds to generate a competitive return. They often have less stringent

requirements than commercial hard-money lenders. Normally, private lenders will only work with

people they know and trust. Their loan terms can vary greatly from borrower to borrower and from deal

to deal.

There are basically two types of hard-money

lenders: commercial companies and private

money investors.

Think of a hard-money lender as a

much more civilized version of a

loan shark, but without the baseball

bat wielding enforcers.






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WHO USES HARD MONEY LOANS? Hard-money loans and transactional funding are not for everyone. There are some real estate

professionals however who depend very heavily on these sources of non-conventional financing.

They include:

FIX-AND-FLIP INVESTORS Investors who buy below-market properties with the intent of renovating

and updating them, and then selling them for full market value, can benefit

from HMLs. These projects are short term, averaging less than a year,

making HMLs very appealing.

DEVELOPERS This is another group that turns properties around quickly. Often,

conventional financing for developments take months to obtain, and

require endless amounts of paperwork. HMLs allow the developer to

focus on the project and less on the financing.

SHORT-TERM BRIDGE FINANCING, RENTAL PROPERTIES The financing of an investment property can be time consuming and paper intensive.

For the HMLs, the decision is quick and asset-based. This allows the investor the peace

of mind to plan and progress, rather than obsess about a credit-based decision

with conventional lenders.

FORECLOSURE/AUCTION PURCHASES

In some real estate transactions, timing is of the essence. This can

hardly be underestimated when it comes to foreclosures or auction

properties. Once a deal is located, there may be just days or weeks to

obtain the financing to complete the transaction. Conventional

financing requires 45 days, on average, whereas financing from a hard

money loan can be obtained in less than a week to 10 days.

WHAT IS TRANSACTIONAL FUNDING? Transactional funding is a type of hard-money loan. It is used by wholesalers who need funding to

complete a double-closing. It is often called same-day funds or flash funding because this loan is paid

back within days of obtaining the loan.

Wholesalers first locate properties that can be purchased at prices below the market rate. These

properties are then resold to another buyer for a higher price. The end buyer’s money is used to pay off

the original seller, although it often requires two closings.






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Here is a simplified example:

A highly motivated seller has a house for sale with a market value of $100,000.

The wholesaler offers $70,000, which is accepted by the seller.

The wholesaler finds an end buyer who is willing to pay $85,000 for the home.

To complete the transaction, the wholesaler does a double–closing.

CLOSING #1 - THE A to B TRANSACTION

The wholesaler uses Transactional Funding to pay the seller $70,000.

CLOSING #2 – THE B to C TRANSACTION

The end buyer pays the wholesaler $85,000, plus closing costs.

The Transactional Loan for $70,000 is paid off using the end buyer’s funds.

The wholesaler keeps the remaining $15,000, less the cost of the Transactional

Loan.

In this scenario, it would be impractical for the wholesaler to obtain conventional financing since the

money supplied by the wholesaler is only borrowed for a matter of hours. Transactional funding is the

solution if the wholesaler does not have sufficient personal funds to cover the purchase price.

In the past, some title companies, knowing there would be two back-to-back closings, would complete

the initial closing with “imaginary” funds, and then handle all the financial transactions, such as any

mortgage payoffs, during the second closing.

The problem with this method is that technically, a property cannot transfer ownership until all prior

liens have been paid. This posed a significant risk to the title company if the end buyer did not complete

his or her side of the transaction. Due to this potential complication, many title companies no longer

allow cross-funding, and require each transaction to be completely paid for before starting the next.

Because wholesaling Nashville properties has grown in popularity, it has created a demand for

transactional funds. Transactional funding lenders will charge a fee based on a percentage of the

amount borrowed. This fee typically amounts to between 1.5 percent and 3 percent of the loan amount.

It is paid to the lender at closing.

ARE HARD MONEY LENDERS REGULATED? These hard-money and transaction funding lenders are not regulated the same way as banks. They are,

however, regulated at the state level, but are not subject to the lending regulations that dictate lending

terms to banks and mortgage companies. This allows them the freedom to make decisions on a

property-to-property or borrower-to-borrower basis.






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Hard-money lenders focus more on the property value and less on the borrower’s financial status and

credit history. Each state, including Tennessee, sets a usury limit, or a cap on the maximum amount of

interest that can be charged on a loan. Tennessee’s usury limit is applicable to hard-money loans.






http://usurylaw.com/state/

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Chapter 2: Weighing the Risks and Benefits of Hard-Money Loans to the Borrower

Ask any seasoned real estate investor specializing in buying and rehabbing properties, and they will

probably tell you that they have used hard money. This type of loan can be a perfect solution to a rapid

transaction and a quick return on their investment.

Hard money can be used on almost any type of real estate investing in Nashville, including commercial,

apartment buildings, residential, for sale by owner, bank owned or real estate owned (REO) homes,

foreclosures and auction properties. Often, the higher costs of using a hard-money lender is quickly

offset by investors’ ability to generate a high return on their investment dollars.

Before rushing off to get this quick, cold hard cash however, it is important for borrowers to clearly

understand both the risks and benefits. If not used properly, a hard-money loan can quickly turn into a

financial disaster for the borrower.

Hard-money loans are not designed for buy and hold properties. Their high interest rates will convert

any income property into one with a negative cash flow. These are short-term “bridge” type loans that

are designed for either a fix-and-flip purchase, or a fix-and-refinance property.

RISKS BENEFITS






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HARD MONEY LOANS

THE BENEFITS WHAT IT REALLY MEANS…

Loans are based on property value The borrower’s credit rating is less of an issue

Loan-to-value ratio is calculated off market value or the after-repair value (ARV)

The difference between the purchase price and the market value is used as the down payment

Can include repair costs

Renovation costs can be funded using a loan based on the ARV

Closings happen in one or two weeks instead of 45 days as with banks

Sellers like quick closings, as do investors

THE RISKS WHAT IT REALLY MEANS…

Hard money is more expensive Expect to pay up to 10 points

High interest rates Expect to pay double-digit interest rates

Short-term loans Most loans only last 6 months to 5 years. Not for buy and hold properties

Low loan-to-value ratio The deal will need at least 30% equity, often 45%

Credit score of at least 600 Most lenders require decent credit

Transactional funding has very high up-front fees. Wholesalers however rarely bat an eye because

without this type of financing, they would be unable to complete the deal. In the previous example, the

wholesaler plans to earn $15,000 from the deal. Even though the transactional loan may have cost

$2,500, the wholesaler is still walking away with $12,500. Without this loan, there would be no deal and

no profit.

Transactional funding allows investors and wholesalers to capitalize on great real estate deals, without

needing a large bank account to fund the double-closing.






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TRANSACTIONAL FUNDING

THE BENEFITS WHAT IT REALLY MEANS…

No credit checks required It doesn't matter how bad the wholesaler's credit is

No proof of income required Borrowers do not need to prove that they can pay back the loan

No money down is needed Borrowers do not need to use their own money for a down payment

No out-of-pocket money is used The loan is paid out of the end buyer's money

THE RISKS WHAT IT REALLY MEANS…

Property limitations No funding for mobile homes

Real estate only transactions No funding for vehicles or personal property

End buyer is needed No funding until end buyer has proof of funds

High loan fees Expect to pay 1.75% to 3% of the purchase price in fees






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Chapter 3: WHAT IS REQUIRED FOR A BORROWER TO GET HARD MONEY?

The appeal of hard-money loans to investors is the expedited underwriting process. However, that does

not mean hard-money lenders simply throw money at every deal that passes by their front door. Hard-

money lenders are in the business to make money, so they do have requirements to qualify a borrower.

WHAT YOU MAY NEED TO QUALIFY FOR A HARD

MONEY LOAN

DECENT CREDIT

A hard-money lender is primarily interested in the equity position of a

transaction. The lender wants to make sure the project will earn a

substantial return and that the exit plan is realistic. Also, some, but not all,

hard-money lenders will want to make sure borrowers have a history

of repaying their loans. A credit check will help determine this.

The higher the FICO score, the higher the loan-to-value. For example, a

borrower with a credit score of 750 may qualify for a loan at 75 percent

of the ARV, where as a borrower with a score of 640 may only get a loan

for 55 percent of the ARV.

Other lenders, on the other hand, could care less about the credit score, and are more interested in how

the loan will be repaid. A very profitable deal can easily overshadow poor credit.

EXPERIENCE

As humans, we often establish personal certainty by another’s

experience. For instance, we want to make sure our surgeon has

successfully performed a particular procedure first. Or, we ask our friends






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to recommend a good real estate agent. And we definitely want to make

sure a contractor knows his or her stuff.

Well, hard-money lenders want to establish that same type of confidence

in their borrowers. Since many borrowers are planning on flipping the

property after completing repairs, the lender will want proof that the borrower has the experience to

complete the project as planned.

DOWN PAYMENT

Suppose a property is being purchased at a discount of 30 percent from market value, which creates an

immediate loan-to-value (LTV) of 70 percent. Even though there is a 30 percent equity position, a

conventional bank loan would still require a 20 percent down payment based on the purchase price.

A hard-money loan, on the other hand, will factor in that 30 percent of equity. But, most hard-money

lenders are going to require some out-of-pocket money from the borrower. The inability to put any

money down is a quick indicator of lack of experience.

Remember the 2010 foreclosure crisis where banks were writing loans with 100 percent financing?

When borrowers have no skin in the game, it is much easier for them to walk away and leave their debt

obligation behind. With that being said, new borrowers can expect to pay 10 percent to 20 percent of

the purchase price on a hard-money loan.

EXIT PLAN

Hard-money lenders do not expect to receive monthly payments for decades

deriving their profits from the interest charged. Instead, they are expect to

gain most of their profits by charging points. This allows them to get their

money back quickly in order to invest it again. As such, all borrowers will need

to have a well-established exit strategy and proof that it is market driven. Most

will also want a backup exit strategy that is advantageous in case all does not go

as planned, which usually includes the ability to get a conventional mortgage, if necessary.

CLOSING COSTS ON HARD MONEY LOANS Borrowers can expect to pay some costs at closing. Most hard-money lenders will require a full appraisal

to verify an investor’s projections. They may even want to verify repairs and remodeling costs.

Background checks and credit reports are typical costs as well. There will also be the cost for a title

policy and, often, a lender’s mortgage insurance policy. A borrower can expect to pay somewhere in the

neighborhood of $500 to $2,000 in closing costs, which is still much lower than a conventional loan.

In addition to closing costs, hard-money lenders will also charge points. Most will require between two

to 10 origination points. A point equals 1 percent of the loan amount. Points are usually charged up-

front and are payable at closing.






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EXAMPLES OF HARD MONEY LOAN TERMS Hard-money loan terms will vary from deal to deal and from state to state. It can be helpful, however, to

review some examples of the types of loans that are written.

Example #1: Small Residential Property

Interest Rate: 15% Points: 5 Interest-only payments.

Payment Due: The 15th of each month to allow the landlord time to collect all rent payments.

Repeat borrowers may obtain interest rates at 12% with only 2 points.

Example #2: Commercial Property

Interest Rate: 18% Points: 8 Interest-only payments.

Example #3: Fix and Flip

Interest Rate: 12% - 15% Points: 2 – 4 Interest-only payments.

Term: Less than 12 months Prepayment Penalty: None

Example #4: High Points/High Risk Loans

Interest Rate: 15% – 18%

Points: 2 upfront, 2 per month, 2 at the sale of property

Some loans will be fully amortized with monthly principal and interest payments. Others will be monthly

or even annual interest-only payments. It should be noted that interest-only loans actually raise the

lender’s yield since the loan balance never decreases. Amortization can vary as well, from five to 30

years. Borrowers should be aware that some loans will come with a prepayment penalty.

BiggerPockets.com has compiled a Hard Money Lenders Directory for the United States, with lenders

categorized by state. Many of these lender sites list their loan terms and rates to give you an idea of

what is available.






http://www.biggerpockets.com/hardmoneylenders

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Chapter 4: How Private Investors Can Make Money from Hard Money Loans and Transactional Funding

Up to this point, the focus has been on the benefits and use of hard-money loans and transactional

funding from the borrower’s point of view. The reality is that this non-traditional type of financing can

be as equally beneficial and profitable to a private lender.

When it comes to investing capital, there are many options; some quite risky and others, not so much.

Often, however, the returns on conventional investments seem out of the direct control of the

investor’s direct control. Take, for example, investing in stocks and money market funds. Before

investing, brokers use whatever tools are available to try to ascertain - or shall we say crystal ball - a

future return forecast. How that specific stock, mutual fund, or real estate investment trust (REIT)

actually performs is out of the control of both the investor and their broker.

To offset such risk, some investors exchange the unknown for a more stable and predictable return by

investing in the CD and bond markets. The problem here is that the returns can hardly keep pace with

inflation.

Private mortgage lending, and particularly transactional funding, should be carefully examined as an

alternative. This less common investment opportunity offers more control, safety, and profitability than

other more conventional choices.

HOW MUCH MONEY DOES A PRIVATE MONEY

LENDER NEED TO START? Hard-money loans can be as small as $10,000. These are often used to pay

down payments, secure owner financing, or as a second mortgage. The highest

demand comes from investors who fix and flip properties. They will require

loans to cover the purchase price of the property. Typically, this will be in the

range of $50,000 to $120,000. There is, however, a market demand for hard

money loans in excess of $500,000 and even over the one million dollar range, though borrowers

typically seek these amounts from commercial hard-money lenders.

Transactional funding loans will need to be large enough to cover the initial purchase price. A good way

to estimate loan demand in Nashville is to contact a local licensed real estate agent. A Nashville realtor

will be able to tell you what price range is moving the most. Also, ask the realtor about the lowest range

of value. Wholesalers will be active in this category. This will help a private lender to determine where

the demand is in the real estate investing Nashville market.






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10 REASONS INVESTORS SHOULD CONSIDER

PRIVATE LENDING 1. You, as the investor, are in complete control. You decide exactly where your money goes and

how much you will earn from each investment.

2. Regardless of the economy, private mortgage lending offers predictable returns.

3. All investments are secured by tangible real estate. In the event that the borrower defaults, the

lender – public or private – has the legal right to repossess the property.

4. It is a safe investment opportunity. It is so safe, in fact, that the Internal Revenue Service (IRS)

has approved its use in self-directed retirement funds.

5. There are no load or brokerage fees.

6. The loans are short-term, allowing for rapid reinvestment.

7. It is a hands-off investment. You can write the loan from your desk without ever seeing or

managing the property.

8. Transactional Funding lenders can earn thousands of dollars in a matter of a few days.

9. Private Mortgage Investors are not subject to the laws binding banks.

10. The investment returns are set by the lender and are a legally binding contract.

Private lending is safe, secure, and profitable. All the variables sit in the control of the lender. The lender

decides the down payment, the length of the loan, the interest rate, the number of points paid at

closing, and when the payments are to be made.






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Chapter 5: How to Write Hard Money Loans

When it comes to reaping large financial gains on temporary investments, private mortgage lending in

both hard-money loans and transitional funding are cash cows. However, before a private investor lends

out their hard-earned cash in promissory notes, there are some steps to take to protect that investment

and ensure it is returned.

TYPICAL BORROWERS When it comes to real estate transactions in Nashville, there are several different types of investors that

seek short-term loans. These include wholesalers, developers, speculators, landlords, fix-and-flip

investors, and fix-and-hold investors, also referred to as cash flow investment properties. Private money

lenders are looking for buyers who will either resell within six months to five years, or remodel a

property within six to 18 months and then obtain conventional refinancing.

Professional wholesalers and rehabbers make

great candidates for hard-money loans and/or

transactional funding. They are experienced and

reliable. They understand that time is money and

the quicker they can flip the deal, the more cash

they free up. Often, these professionals will

complete 10, 20, or over 30 transactions a year. This allows PMLs to make multiple loans annually to

proven clients.

In addition, experienced real estate investors (especially wholesalers and rehabbers), only make offers

on properties that are substantially below market value. This creates an instant equity position for the

private lender. Banks require large down payments based on the purchase price, not the appraised

value. If an investor finds a $100,000 property that is being sold for only $70,000, the bank will still

request a $14,000 down payment (20 percent of the purchase price) even though there is an immediate

30 percent equity position (based on the market value). Hard-money loans are based on the appraised

value, rather than the purchase price.

Because these properties are priced attractively, there is often a great deal of competition and the

quicker the close, the greater the chance the investor will beat others to the property. Getting a bank

mortgage that requires 30 to 45 days to close is often too long to wait. The ability to obtain quick

financing is worth the additional costs of financing. In this case, time is money.

Professional wholesalers and

rehabbers make great candidates

for hard money loans and/or

transactional funding






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DO NOT LEND TO DISTRESSED HOMEOWNERS Homeowners who are facing foreclosure can be a real hard case to turn away. Caught in a spiraling

downward loop, many optimistically think that a quick mortgage payoff with a hard-money loan will

help them start anew. Unfortunately, another loan rarely, if ever, gets them out of financial distress.

Borrowers who are facing foreclosure are typically not

eligible for conventional refinancing. Often, they are not

even eligible for loan modification. A hard-money lender

who rescues a homeowner from an imminent foreclosure

assumes an extremely high risk. Most likely, the hard

money lender will have to foreclose on the borrower and

then sell the home to recoup the total investment cost, including the cost of foreclosure. A lack of equity

also makes these properties even more dangerous. A good rule of thumb is to only lend to proven real

estate professionals to offset risk.

HOW TO PROTECT YOUR HARD MONEY

INVESTMENT Anytime a lender loans out money, there is a risk of non-payment. Private lenders stand a greater risk to

lose all their working capital, especially when it is invested in a single transaction. There are, however,

several steps private lenders can take to protect their investment.

GET A LENDER’S TITLE INSURANCE POLICY A lender’s title insurance policy is very similar to a buyer’s title insurance. This

policy will repay your investment in the event that the property’s title is

unmarketable due to prior liens or a break in the chain of title that was

missed in the original title search. This policy is purchased from a title

company, and can be paid by the borrower at closing.

GET LISTED ON THE PROPERTY’S INSURANCE POLICY Homeowner’s insurance policies are required when a property is under a

mortgage. This covers whomever is named on the policy from loss caused by

damage, injury, or a total loss of the property. The private mortgage lender

should be named on the policy as a loss payee. In addition, private investors

should be given proof of insurance upon each renewal cycle. The borrower is

liable for the cost of this policy.

ALWAYS USE A THIRD PARTY TO HOLD THE FUNDS Never pay the borrowed funds directly to the borrower. Deposit them in the same escrow account that

is being used for the closing. This should be held by either an attorney, or a title or escrow company. The

funds are not released until all requirements are completed and a saleable title can be provided.

Only lend to proven real

estate Professionals






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PUT IT IN WRITING AND RECORD IT It doesn’t matter who you are lending to, always put the agreement in writing – even if you are lending

money to your granny. As time goes by, it becomes easy and convenient to forget the terms of a verbal

contract. A private mortgage lender is advised to use a promissory note and secure it with a mortgage or

deed of trust, which is recorded.

THE PROMISSORY NOTE OR CONTRACT Before a mortgage can be created, there must be terms developed and agreed upon. The terms

of the mortgage are stated in the promissory note. This is also known as a note contract, real

estate lien note, or a borrower’s note. It contains the terms, including the loan amount, interest

rate, payment amount, amortization schedule, and maturity or balloon date, plus the legal

ramifications for default.

THE MORTGAGE OR DEED OF TRUST The state where the property is located will determine whether the lender will record a

mortgage or a deed of trust. Tennessee allows deeds of trust. The deed of trust is recorded by

the county, and creates a lien against the property. This is the security for the loan.

A mortgage involves only two parties: the borrower (mortgagee) and the lender (mortgagor). A

deed of trust includes a third party – the trustee who holds the deed until the contract is

fulfilled. Usually, the trustee is the escrow company that handled the closing.

Both a mortgage and a deed of trust create a lien against whatever property is used to secure

the loan. In the event of non-payment, both documents give the lender the right to foreclose on

the property as payment for the contract.






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The major difference between the two types of documents is how the foreclosure is handled. In

judicial states, lenders must use a mortgage and go through the court system to complete a

foreclosure. This can be an expensive and protracted process.

In nonjudicial states, like Tennessee, the lender can use the deed of trust and bypass the courts

during foreclosure. A deed of trust is the preferable mortgage document, but it depends on

whether the state is a judicial or nonjudicial state.

Regardless of the document being used, make sure it is recorded against the real estate that is being

used as security for the hard-money loan.

HOW TO GET YOUR MONEY OUT EARLY From time to time, hard-money lenders will lend for an extended period of time. This is called cash flow

investing. Often, this type of investing is provided to developers who are unable or unwilling to obtain

conventional financing. But what if the lender would like to be paid off early? There are several early

exit strategies.

Give the Borrower a Discount for Paying Off Early. For example, if after three years there is a

loan balance of $50,000, the lender could offer a payoff discount of $47,500. This can create the

motivation to refinance with a conventional lender, but it will also lower the lender’s yield.

Sell the Promissory Note. There are plenty of other private lenders who are eager to buy

promissory notes in Nashville properties. This is exactly what banks do to recoup their money. They

write a loan and then sell it at a discounted rate to the secondary mortgage market. Smaller banks with

limited capital make their money from points and closing costs, whereas the secondary market makes its

money off the interest.

Sell Part of the Promissory Note. Lenders can legally sell the right to receive future loan

payments for a period of time. For example, a $200,000 hard-money loan is recorded at 8 percent

interest and has a 15-year term. The lender needs $25,000 to reinvest in another deal. Rather than lose

all the interest by selling the mortgage, the lender decides to sell the next 15 payments to another

investor for $25,000. The buyer will make $3,823 on the deal. When the 15th payment is made, the

payments revert to the original lender.

Amortize Long Term and Include a Balloon. Perhaps the easiest way to ensure early payment is

to include a balloon in the contract. Typically, a balloon payment is due in less than five years. The actual

loan, however, is amortized for 20 or 30 years. This makes the payments lower for the borrower, but it

also means the borrower will be paying almost pure interest payments for the first five years. When the

borrower refinances with a conventional bank, the hard-money lender will receive almost 100 percent

of the originally borrowed amount.






http://www.foreclosurelaw.org/

20



Chapter 6: Transactional Funding: The Way to Make Your Money Work for You

Assume that a private investor has $120,000 in cash to put somewhere. He wants to get the best return

on his investment. The following investment options should be taken under consideration:

Bond Stocks Income Property Hard Money

Loan Transactional

Funding

5 Yr. U.S. Treasury S & P 500

Single Family Home Interest Only 1x Month

Investment $120,000 $120,000 $120,000 $120,000 $120,000

Term 5 Years 5 Years 5 Years 5 Years 5 Years

Points n/a n/a (Rent $1,200 mo.) 5 n/a

Interest Rate 1.8% 6.2%* (Expenses 50%) 12.0% 2.25%

Annual (Net) Income $2,188 $7,452 $7,200 $14,400 $32,400

Total $11,196 $42,184 $36,000 $82,000 $162,000

Income (Compounded

Annually) (Compounded

Annually) (Not Including Value

Appreciation) (Including

Points)

* Compound Annual Growth Rate (CAGR) 1/1/2008 - 12/31/2013

As the above example illustrates, both hard-money lending and transactional funding created a return

that far exceeds what can be gained in a stable stock market investment, and even in standard real

estate investments. The transactional funding example was based on lending $120,000 to complete a

double-closing once per month, at a fee of 2.25 percent or $2,700 per transaction. The loan technically

lasts only several hours until the end buyer pays for the property. This would effectively free up these

funds to complete multiple transactions per month.

PRIVATE MORTGAGE LENDING IS MORE PROFITABLE THAN REAL

ESTATE INVESTING Private mortgage lending can be even more profitable than buying real estate itself. Imagine paying

$200,000 for a four-unit rental that charges a total of $2,000 rent each month (using the standard 1%

rule where monthly rent equals 1% of the purchase price). Applying the 50 percent rule where half of

the gross income goes to expenses, such as vacancy, taxes, insurance, repairs, owner-paid utilities and

capital reserves, the owner would pocket $12,000 per year.

Transactional loans last

only a matter of hours.






http://www.moneychimp.com/features/market_cagr.htm

21



If the property appreciates at a rate of 5 percent per annum, at the end of five years, the property would

be worth $255,300. When sold at the end of the fifth year, the owner would have earned a total of

$115,300, factoring in rental income and the resale value (less closing costs and sales commission

payments).

Take that same $200,000 and lend it to a five-year, interest-only hard-money loan at a rate of

15 percent, with five points paid up front. The five points would amount to $10,000. The interest-only

payment would be $2,500 per month. Over five years, the total payment, including points and interest,

would total $160,000! On top of that, the lender has free time to do what he or she wants. There would

be no late night calls from tenants, running after rent checks, dealing with repairs, or any of the other

responsibilities of owning real estate.

Hard-money loans, however, are not the highest return you can get for your cash. Transactional Funding

can effectively double that return, and significantly reduce the risk. Take that same $200,000 and make

it available to experienced wholesalers who will use it for a double-closing. Your funds are released by

the title or escrow company only upon proof that the end buyer has his or her funds at closing. This

effectively eliminates the risk to the private investor.

The wholesaler agrees to pay a 2.25 percent transaction

fee of $4,500. For example purposes, this wholesaler

completes two transactions per month, each requiring

$200,000 worth of transactional funding. The private

investor earns $9,000 per month, even though the monies

were only loaned for less than two days. The annual income for the private investor amounts to a

whopping $108,000, or a 54 percent annual return. Try getting that in the stock market! With only one

transaction per month over five years, the private investor would earn $270,000 virtually risk free!

IS THERE REALLY A MARKET FOR TRANSACTIONAL

FUNDING? As the adage goes, “If it sounds too good to be true, it probably is.” Ninety-nine times out of a hundred,

that statement is usually true. In this case, however, that adage does not apply. There is a strong market

demand for transactional funding and limited risk to the investor.

During the 2010 foreclosure crisis, real estate investors carved a new field in real estate – wholesaling.

Real estate wholesalers work a little differently than licensed real estate salespersons. They do not

represent the buyer or the seller. They are not “selling” real estate, therefore, they are not required by

law to be licensed. Wholesalers are selling their interest in a contract, - not the real estate itself. Though

the concept is a little unconventional, it is completely legal.

Transactional funding is

low risk and creates an

extremely high ROI.






22



Wholesalers find motivated sellers with bargain properties, then add value to the transaction for an

investor. Motivated sellers are more concerned with quickly liquidating their property, so they are

willing to sacrifice equity for expediency. Motivated sellers include individuals or entities with the

following conditions or situations:

Cross-country job changes

Out-of-state owners

Abandoned properties

Run-down rental property owners

Probate properties

Divorces

Bank owned or REO properties

Once the wholesalers find below market properties (usually 20% or more below market), they get the

property under contract as the buyer. They then locate an end buyer who is willing to pay more than the

purchase price, but still less than the market value. Wholesalers frequently work with property

rehabbers and landlords as their end buyers.

Once an end buyer is found, the wholesaler can “sell” the contract in one of two ways. Some

transactions will allow the wholesaler to assign the contract to the end buyer. In this instance, the

wholesaler submits an invoice for their services to the title company, which then will be included as a

closing expense to the end buyer.

Another option, and the one most frequently used one, is to complete a double-closing. On the day of

the closing, the wholesaler, acting as the buyer, pays the seller the agreed-upon purchase price. This is

an A to B transaction, where B is the wholesaler. On that same day, the wholesaler, now acting as the

seller, completes the closing by selling the property to the end buyer. This is the B to C transaction. The

difference between these two closings represents the money earned by the wholesaler.

The problem wholesalers run into is that they do not have the cash on hand to complete the first

transaction with the seller. Conventional lenders do not write loans that only last 24 hours. This is where

transactional funding comes into the picture. Without transactional funding, the wholesaler has no way

to complete the two sales. Without access to transactional funds, the wholesaler would be unable to

complete the purchase from the seller, and the sale to the end buyer.






23



Chapter 7: How to Write Loans for Transactional Funding

Transactional funding loans carry much less risk than hard-money loans. This is due to the fact that the

loan only lasts a matter of hours, or at most, days. Additionally, the end buyer is willing and able to

complete the transaction, creating an instant repayment of the transactional funds.

There are a few steps, however, that transactional lenders need to follow before releasing their funds to

wholesalers.

GET A COPY OF BOTH PURCHASE AGREEMENTS

The lender will want to review both purchase agreements. This includes the initial purchase agreement

between the seller and the wholesaler, and the purchase agreement between the wholesaler and the

end buyer.

Pay particular attention to how the end buyer intends to pay for the purchase. This will be indicated on

the purchase agreement. If the end buyer plans on getting bank financing, ask for a copy of the pre-

approval letter from the lender. Make sure the loan amount, plus the stated down payment, equals at

least the purchase price on the second contract.

Next, make sure there is enough profits to pay for the cost of the transactional funds. Subtract the

original purchase price from the end purchase price. The difference is the payment to the wholesaler,

less any closing costs, including the fee for the transactional loan.

AGREEMENTS

AGREEMENTS






24



DEPOSIT THE FUNDS IN THE CLOSING ESCROW

ACCOUNT Never turn over the funds directly to the wholesaler. The person could be tempted to take the money

and run. Release the funds to whomever is handling the closing. This will be either an attorney or a

title/escrow company. The money will then be placed securely in the wholesaler’s escrow account.

Make sure that proof of funds from the end buyer is provided before your loan amount is released. In

other words, before the first closing between the seller and the wholesaler is completed, the end buyer

must be present and be able to prove the funds are available to complete his or her end of the

transaction. Often, the end buyer’s lender will also deposit the funds into the same escrow account.

When this happens, the private money lender can breathe easy knowing that repayment is guaranteed.

SUBMIT AN INVOICE TO THE CLOSING COMPANY Transactional lenders make money by charging a fee for the use of their money. This fee is based on a

percentage of the amount borrowed, typically between 1.5 percent and 3 percent.

Most, if not all, wholesalers are unable or unwilling to pay the fee up front. The easiest way to get paid

is to submit an invoice to the closing company when the transactional funds are deposited in the escrow

account. The attorney or title company handling the closing will subtract this amount from the profit the

wholesaler makes from the deal. A check covering the transactional funding fee will be mailed or

directly deposited into the account of the transactional lender. You do not need to be present at the

closing.

SKIP THE CREDIT CHECKS One of the great features of transactional funding is that the creditworthiness of the borrower has

absolutely no relevance. The borrower could have a credit score of 500 and a bank balance of $25 and a

transactional funding lender will loan this person hundreds of thousands of dollars tomorrow. Why?

Because the borrower is not the one who pays back the loan. The end buyer supplies the repayment.

You do not even have to worry about qualifying the end buyer. How or where the end buyer gets the

money is of no concern to the transactional funding lender. If the buyer needs bank financing, the

person will have to qualify to get the loan with the bank of choice. If the end buyer cannot produce the

funds necessary to close, the attorney or title company will refund the transactional funds to the

transactional funder.

REMEMBER THAT YOUR SUCCESS LIES WITH

WHOMEVER HANDLES THE CLOSING When a private money lender provides transactional funds, all that matters is that the transaction is

completed. The funds and the invoice for the loan fees have been submitted to either the closing

attorney or the title company. As long as the transactional funds are not released until the end buyer






25



has proof of payment, the lender is guaranteed his or her fee. Thus, the responsibility lies with the

closing company and since it handles these transactions on a daily basis, it is well aware of the liability it

is assuming.






26



Chapter 8: Using a Self-Directed Retirement Account to Fund Loans

Hard-money loans are legally secured with real estate. This is clearly stated

within the mortgage document. In the event the borrower is unable to

repay the loan, the hard-money lender has the right to foreclose on

the property and sell it to gain repayment.

Transactional funding loans are secured through the end buyer’s

payment. If the end buyer is unable to obtain the funds to complete

the property purchase, the transactional funds are not released and

are returned to the lender.

Because both of these transactions are safe, the IRS has approved them as

investments for self-directed retirement plans. These funds can be used to

invest in real estate, and to write hard-money and transactional funding loans. The income and gains

from these investments roll back into the retirement account for building wealth.

SELF-DIRECTED RETIREMENT ACCOUNTS THAT

CAN BE USED Individual Accounts

Traditional IRA

Roth IRA

Small Business Plans

SEP

Simple

Solo 401 K

Alternative Accounts

Coverdell Education Savings Accounts

Health Savings Accounts

Any of the above accounts can be used if they contain sufficient capital to fund the transaction

and the custodian is willing to hold the asset. However, when investing your IRA, you must know

what transactions are prohibited and who is disqualified from doing business with your IRA or

benefiting from your IRA’s investments. The general rule is defined in the Internal Revenue Code

(“IRC”) Section 4975(c) (1).

IR

A






27



HOW TO SET UP AND USE A RETIREMENT ACCOUNT

FOR HARD MONEY LOANS In order to structure an account that best matches your particular

financial position and investment goals, it is highly recommended

that you seek professional support from a financial advisor.

A financial advisor is in the best position to know which option is

best for your situation, and to structure the retirement account to

maximize your investment potential.






28



Chapter 9: How to Get Started as a Private Money Lender

It is clear to see that using investment funds to finance hard money and transactional funding loans in

Nashville can be even more profitable than direct real estate investments. It is an excellent way to

create cash flow with little risk, while enjoying high capital returns. The next step is to get started, but

how?

DO YOU WANT INCOME NOW OR LATER? You must first define your financial goals and what you would like to achieve through private lending.

Though there are tangible tax benefits from using a self-directed retirement account to write these

loans, the income is not accessible until retirement. Generally, any money pulled from the account for

personal use is subject to prepayment penalties if withdrawn before 59-1/2 years of age. If you are

looking to build future wealth and retirement income, use a self-directed retirement account.

If the gains generated from private funding will be taxed as earned income, it would be best to set up a

limited liability company (LLC) outside of the retirement account. This is discussed later in this eBook.

DO YOU WANT DIRECT INVOLVEMENT OR JUST

INCOME? Some private investors are nervous about finding and qualifying a borrower on their own. They would

prefer to pool their resources with others, or take a more hands-off approach and simply reap a 6 to 8

percent return on their pooled funds. Other private lenders, who are willing to work directly with their






29



personal funds, find the thrill of a cash-on-cash return of 15 to 20 percent too enticing to leave to

others.

HANDS-OFF INVESTMENTS As a way to get their feet wet or reduce risk, some private lenders pool their resources in REITs

or with other commercial hard money lenders. Commercial hard-money lenders offer their

investors a predetermined return on their investment.

Another option is to buy into an existing note. Although buying a set amount of payments and

then earning additional interest is slightly more of a hands-on investment, it still carries low risk.

HANDS-ON INVESTMENTS Direct investments in hard-money loans entail finding borrowers, qualifying them, writing and

recording the contracts/mortgage notes, and doing other due diligence to ensure repayment.

The returns on personally funded hard-money loans will be much higher than a more hands-off

investment, but this route is more time intensive and slightly more risky.

Transactional funding is another hands-on investment opportunity that requires direct

involvement by the private money lender, but significantly reduces the borrower’s qualification

requirements and the risk while still providing exceptionally high returns.

YOU NEED TO PROTECT YOUR MONEY Once you have decided on whether to use a self-directed retirement account and whether to be directly

involved in financing or to pool your resources, the next step is to secure your money.






http://www.biggerpockets.com/hardmoneylenders

30



CREATE A LIMITED LIABILITY CORPORATION A simple way to separate your financial business from your personal assets is to establish a

limited liability company, or LLC. This is a requirement in some self-directed retirement

accounts. Talk to your accountant or financial advisor to discuss the details.

GET IT IN WRITING Whether you are investing with others in a commercial hard-money lending pool or directly with

borrowers, make sure all agreements are in writing. The agreements should collectively

stipulate the return on investment and the consequences for default. In addition, make sure the

security agreement for the promissory note is recorded.

COMPLETE YOUR DUE DILIGENCE Do not rush into a deal. If you are pooling your money with other investors, make sure they

have a proven track record. Talk to other investors. Understand what happens to your money

and dividends if the market turns or if a deal goes sour.

If you are directly lending to borrowers, make sure they qualify. All borrowers must have a

legitimate exit plan, such as a flip in four months, and a backup plan, such as a refinance in six

months if a sale does not occur. Get a real estate appraisal to verify market value and your

equity position.

LEARN TENNESSEE’S FORECLOSURE LAWS Occasionally, a hard-money loan is bound to go bad and the borrower defaults. When that

happens, you will need to foreclose on the property, and then sell it to recoup your total

investment cost. Foreclosure laws differ from state to state, which is important to know if you

are investing in real estate outside of Tennessee. Some states require you to go through the

court system, while others, such as Tennessee, are non-judicial states. Knowing the state’s







31



foreclosure laws will allow you to prepare your documents in a way that will facilitate an easy

settlement.

HOW TO FIND A BORROWER Once you are prepared and ready to become a private money lender, you will need to locate borrowers.

As previously mentioned, stay away from homeowners, people in or near foreclosure, and

inexperienced investors. Focus on wholesalers and professional real estate investors. They offer a much

more secure investment opportunity.

LOOK FOR ADVERTISEMENTS Perhaps you’ve seen those signs nailed to utility poles, stuck on the side of cars, or plastered on

information bulletin boards that read: “We Buy Ugly Houses” or “We Buy Houses for Cash.”

They are called bandit signs, and wholesalers use them to find sellers. These wholesalers are

often in need of transactional funding. Give them a call.

USE THE INTERNET Surf over to Craigslist and look for similar advertisements. Keep your eye open for statements

like “Wholesale Deals X% below ARV” or “Homes for Sale Below Market Value.” These are

expressions used by professional

investors. Your local newspaper can

be a good resource as well.

Visit online forums, such as

BiggerPockets and REI Club, to

connect with real estate investors.

These are places where real estate

professionals come to network. They

can be a good source for finding borrowers who are looking for hard-money loans and

transactional funding and who have the ability to repay.

CREATE A NETWORK Start to get the word out. Talk to realtors, appraisers, contractors, title companies, landlords

and the like. Become a member of your local Real Estate Investors Association (REIA) chapter in

Tennessee and other local real estate clubs. Before you know it, you will be able to pick and

choose borrowers and/or demand the highest rates for your money.

There are few investment opportunities

that offer such a quick and easy way to

reap such high returns from an

investment as hard money loans and

transactional funding.







http://www.craigslist.org/about/sites#US

http://www.biggerpockets.com/

http://www.reiclub.com/

32



ADDITIONAL RESOURCES Hard-money lending and transactional funding (especially) are extremely profitable ways to invest your

private funds. The returns are extremely high, and the risks are manageable. When a borrower defaults

on a private loan, you have every legal right to repossess and sell the property. With transactional

funding, the loan amount is never released until return payment is guaranteed.

Hard-money lending and transactional funding are often overlooked, undervalued investment

opportunities. They are two of the greatly held secrets to creating and compounding wealth and

inordinate amounts of cash flow.

If you are looking for additional assistance in Nashville real estate investing, Beacon Property Solutions

has been created to do just that. I founded this private real estate company to provide investors with

guidance to help them make wise and lucrative investment choices. I want to share my experience and

trusted network with you.

If you want to receive notifications of great deals and valuable information, sign up for my newsletter.

There is no need to do all the market research, create your own investment team, and stumble upon

unseen risks associated with private lending. Instead, join up with an established and trustworthy

network of professionals and let’s turn the dream of compounding cash flow into reality!







http://nashvillebeaconpropertysolutions.com/about/

http://nashvillebeaconpropertysolutions.com/real-estate-deals/

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