What is Transactional Funding?
If you are a real estate investor or wholesaler, transactional funding can be useful to turn a quick profit. Transactional funding is a short term loan provided by a hard money or private money lender. When I say short term, I mean these loans are usually paid back within a week, sometimes even the same day.
Transactional funding is also known as flash funding or same-day funding. The most common scenario is when a real estate professional finds a great deal and can turn a quick profit. Instead of a traditional wholesale deal with an assignment contract, transactional funding allows the investor to close on the property and then quickly re-sell it to another end buyer for a profit. Usually a cash buyer. This type of transaction is also known as a double close.
How is it Different Than Hard Money?
The reality is, transactional funding is very similar to hard money loans. Many hard money lenders and private lenders also provide this short term funding. However, there is one key difference. Transactional funding deals require you to pay the loan back within a very short period of time. Usually 2-3 days or a week max. Many times, a borrower will pay the loan back within 24 hours. This is because the entire transactional typically takes place in one day (double closing).
Transactional Funding for a Wholesale Deal
In most cases, there are 4 parties. The seller, the wholesaler, the lender who will provide the funding and the end buyer. Let’s run through an example.
The wholesaler gets an incoming lead through direct mail. After seeing the property and negotiating with the seller, she puts the property under contract for $100,000. Knowing she has a great deal, she markets the deal to her cash buyers list for $150,000. It doesn’t take long for her to find an end buyer who agrees to pay $150,000 for the property.
Now, in a traditional wholesale deal, she would have the end buyer sign an assignment contract. That buyer would close on the property and and pay her a $50,000 assignment fee. In most cases, cash buyers are happy to pay an assignment fee to a wholesaler. There might be instances, however, where an end buyer won’t like the idea of paying a big assignment fee to a wholesaler. This might be a time where transactional funding would be a good option.
Back to the example. Instead of having that end buyer sign an assignment contract, the wholesaler finds a hard money or private money lender to provide transactional funding. This allows her to close on the house first for $100,000 and then immediately sell it to her end buyer for $150,000. In this example, the wholesaler would earn a $50,000 profit less any closing costs and lender fees.
How Much Does it Cost?
Much like getting a hard money loan to fund a fix and flip deal, transactional funding lenders will charge points and some type of fee (origination or processing fee). Typically lenders would not charge interest because of the short term nature of the loan. Instead, the lender would charge more points up front. In the above example, a lender might charge 4-6 points ($4,000 – 6,000) to fund the deal. The wholesaler would be responsible for pay the fee back on top of the loan amount.
I have seen transactional funding as low as 2-3 points up front and as high as 8-10 points. Usually on a smaller loan you’ll pay more points versus a larger loan. You may have to pay other lender fees such as an application fee, processing fee or wire fee.
Advantages of Using Transactional Funding
- Speed. Transactional lenders can act quickly and provide funds with a week a two. Essentially, it’s the same as purchasing real estate with cash
- Fund 100% of the purchase price. Most transactional lenders will fund 100% of the purchase price. Wholesaler’s and investors will not have to put up any of their own money.
- Double Closing. A big benefit is a double close is to keep separation between your seller and the end buyer. You are following through on the purchase with your seller and you won’t have to disclose your assignment fee to the end buyer.
- Less Red Tape. Transactional lenders usually don’t require appraisals or an insurance policy. There is generally fewer steps and less paperwork vs. traditional lending.
- Can be used for all types of properties. Transactional funding can be used for single family, multi-family, REO’s, foreclosures, commercial and even vacant land.
Disadvantages of Transactional Funding
While transactional funding is a good option for the right deal, it’s not for every deal. If your deal doesn’t have big profit margin potential, the fees of transactional funding might be too much. Additionally, if you don’t have a trustworthy buyer on the other end that will immediately buy the property, transactional funding won’t work.
Because of the short term nature of transactional funding, if you aren’t able to pay back the loan right away you may get stuck with penalties, late fees and expensive interest. What’s worse, the lender could take possession of property you own if it was mortgaged as part of the deal.
Some title companies won’t work with transactional lenders, so make sure you do your homework ahead of time. There are investor friendly title companies in most markets.
Transactional Funding Lenders
There are thousands of private lenders who will provide short term funding as well. If you already work with a hard money or private money lender, ask them if they would consider short term funding. It might make sense to work with someone local who knows your market.
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