What is Transactional Funding?
Transactional funding is a form of short-term, hard money lending, which allows a wholesaler the opportunity to purchase a property with none of his/her funds, provided that there is already an end buyer in place to purchase the property from the wholesaler within a short time frame, usually 2-5 days. It is one of the most useful concepts in real estate financing and, if done properly, a great way to turn a profit.
Typical examples of properties that are flipped using transactional funding are:
- single family;
- multi-family buildings;
- commercial properties (apartment buildings, strip malls, mobile home parks;)
These properties can be purchased as short sales, REOs, or any other means of purchasing real estate. Transactional funding is preferable to other types of short-term real estate financing, like hard money, because the fees are usually lower, there is no credit or income verification, and the paperwork is much simpler.
Until about 2008, real estate investors would flip properties by doing a simultaneous or double closing and use their end buyers’ funds to fund the first transaction between them and the seller. However with the tightening of scrutiny by title companies, especially due to title insurance and financing industry regulations, real estate deals need to be funded before they can be re-sold.
This is how the process works when using transactional funding:
- The Buyer/Investor/Flipper, called party “B,”writes a contract to purchase a property from the Seller “A.”
- The Buyer “B” signs a contract with end Buyer “C” to purchase the property on the same day that “B” purchases it from “A.”
- “B” seeks transactional funding to fund the deal in order to buy the property from “A” and sell it to “C”.
Advantages of Transactional Funding
- Credit score and income of the borrower are not an issue;
- Funding is usually 100% of the purchase price;
- Proof of funds letter provided by the transactional funding lender;
- Limited to no risk – you are not putting up any collateral besides the property being flipped;
- Easy and straightforward paperwork;
- Lower fees than hard money and fees are taken out of the proceeds at closing.
Disadvantages of Transactional Funding as a real estate financing strategy
- Most transactional funding is for only 24 to 48 hours to close (however we offer extended transactional funding up to 360 days;)
- Timing is important and of the essence;
- End buyer lender must be aware of the flip, because of possible seasoning issues (better deal with end cash buyers.)
Extended Transactional Funding
Extended Transactional Funding, which differs from the traditional transactional funding because of the length of time of the term:
- Funding up to 360 days and 100% of the purchase price, as long as the loan to value is 75% or better;
- Fees are only 2% to a maximum of 8% if we hold the loan for 1 year and a transaction fee of $495 paid at the end closing, nothing upfront;
- If we hold the loan on the property over 1 month, we need a home inspection report and an appraisal (we don’t base the loan on the buyer’s credit or finances, but the property only;)
- Insurance binder on the property.