Transactional Funding: What Real Estate Investors Should Know!
When conducting a double closing in real estate, transactional funding is a clever funding method frequently used by wholesalers. Usually, a short-term loan that must be repaid right away, transactional funding is borrowed. Most of the time, it lasts no longer than a day or a week.
Real estate investors can buy and sell properties thanks to this kind of short-term loan without having to use their own funds. Flash cash or same-day funds are other names for transactional funding. Many real estate investors have been using it for a long time.
Real estate wholesalers who must take a property’s title as a formality in order to resell it to another buyer for a greater price would find Transactional Funding to be especially helpful. These kinds of transactions are enabled via short-term loans.
In a B to C transaction, the end-buyer used to be able to sign their closing forms and deposit the complete payment for the property. Until the wholesaler in the A-to-B transaction has finished the closure with the original seller, the closing agent will hold onto these money.
Following the execution of the closing papers for both transactions, the closing agent would pay the wholesaler the sale proceeds for the B-to-C transaction, and with these monies, the original seller for the A-to-B transaction could be paid the sale profits.
Now, it is much preferable for real estate investors to utilize their own money for the first transaction, the A to B transaction, than to use the final buyer’s capital. Transactional funding helps Wholesalers since not all of them have a cash reserve to use for buying these properties.
How Does Transactional Funding Work?
Once the wholesaler has an established end buyer, transactional funding is typically obtained from a private money or hard money lender. The end customer is someone who is prepared to purchase the property as soon as the wholesaler takes possession of it.
The transactional funding lender is subsequently compensated with the funds received from the final purchaser.
Here is how it works:
- The wholesaler finds a motivated seller, that is someone willing to sell their property at a discounted price as soon as possible. This is the first transaction, A to B transaction.
- The Wholesaler then finds an end buyer for the property. This is the B to C transaction. He sells it at a slightly higher price and closes it on the same day as the A to B transaction.
- The Wholesaler then obtains transactional funding to buy the property from the seller.
- After closing the two transactions, the Wholesaler then repays the Transactional Funding loan from the proceeds of the B-to-C transaction and keeps the difference as their profit.
How to Qualify for Transactional Funding
The majority of lenders who provide transactional funding demand that the wholesaler have a confirmed end buyer with the necessary funds to purchase the property. Sometimes the end buyer’s proof of deposit is required.
To ensure there are no past difficulties, collections, or judgments against the borrower, the lender may also run a credit history check on them. They may also want to evaluate the property on their computer and take images of the inside and outside to conduct a check.
If the end buyer opts out after the wholesaler finishes the A to B transaction and there is no way for the lender to get their money back, they may choose to:
- Require the borrower to obtain a short term loan from a traditional lender.
- If the Wholesaler is not able to obtain the loan, the lender could take possession of the property and rehab and resell it.
- The lender can also decide to wholesale the property to another borrower and place their own interest.
Pros of Transactional Funding
- Being on an even playing field with the end consumer gives the wholesaler a competitive advantage.
- The transactional funding typically covers the full purchase price, saving the lender from having to spend his own funds.
- The wholesaler can avoid the seller and the buyer cutting him out of the deal by separating them with a double closing.
- Any form of property can be used for transactional funding, including vacant land, apartments, single-family homes, and multi-family dwellings.
- Hard money loans typically cost more than transactional funding.
Disadvantages of Transactional Funding
- It is usually short term and most lenders require full repayment within 2 to 3 days and extended terms are usually at higher rates.
- Some end buyers and funding companies do not like to work with this type of funding.
Cost of Obtaining Transactional Funding
Transactional funding has a range of costs; the interest charged depends on the loan size, tenure, and how dangerous the lender considers the loan to be.
A typical charge structure for transactional finance is between 1% and 2.5% of the loan amount, however this might increase if the duration is longer or there are additional risks involved.
In the end, everything relies on the terms that the lender and borrower agree to. Lenders have the option of charging a flat rate or interest on loans.
See Also: Banks that give Business Loans without Collateral
Transactional funding is amongst the creative ways for an investor to raise money. Those other creative ways can be the Investors go to incase this technique fails. They include:
- Private money lenders
- Hard Money loans
- Home equity line of credit
- Bank loans.