Transactional funding is a short-term loan that is borrowed and paid back quickly, usually within the same day, and sometimes as long as a week. Access to this kind of short-term financing allows real estate wholesalers to buy and resell properties quickly without using any of their own money.
Transactional funding is almost exclusively used to wholesale properties through the double close method. It gives real estate investors the cash they need to buy a property from a home seller and allows the real estate investor to resell it for a profit in a separate transaction.
Why Would a Real Estate Wholesaler Used Transactional Funding?
Real Estate transactional funding serves as a replacement for when assigning contacts isn’t permitted. Such as wholesaling bank REO properties or if you do not want to disclose how much profit you are making to the seller and buyer.
When it’s not possible to assign a contract or if you choose not too, investors may then turn to transactional lending to complete a wholesale deal. As a result, transactional lending enables investors to conduct legal back-to-back closings in a matter of days, if not hours. This is how Paul and I have wholesaled REO properties in 44 states.
While transactional funding has proven invaluable to seasoned wholesalers, there’s one caveat: transactional funding for real estate wholesale deals usually requires an end buyer to be lined up prior to receiving funds. A transactional lender will typically require borrowers to have already found a subsequent buyer for the property.
If you know the wholesale property is a deal but don’t have a buyer lined up or if you are selling to a conventional loan buyer and they won’t be ready for another month then you want to close with a non-transactional loan. Such as a private lender or hard money lender and not a transactional lender.
How Does Transactional Funding Work?
Transactional funding is only used when there is an established end buyer in place. This end buyer should be ready to buy the subject property from the real estate wholesaler immediately after the wholesaler purchases the property from the original seller, and the sale proceeds from the end buyer are used to pay back the transactional funding loan.
Transactional funding can be used with any type of real estate, provided the closing agent is willing to facilitate both transactions and the lender can verify all the important details before dispersing the funds.
Here’s how transactional funding works:
- The wholesaler/investor finds a seller and both parties agree to a below-market purchase price (the A-to-B transaction).
- When the wholesaler/investor finds an end-buyer, they will sign a new purchase agreement (the B-to-C transaction) to purchase the property at a higher price and close on the same day as the A-to-B transaction.
- The wholesaler/investor secures transactional funding to buy the property from the seller.
- When both transactions are complete, the wholesaler/investor repays the transactional funding loan from the proceeds of the B-to-C transaction and keeps the difference as their profit.
For example: If a real estate wholesaler gets a property under contract at $100,000 and then finds an end-buyer that will purchase the property for $120,000. The wholesaler reaches out to a transactional lender and the transactional will review the deal. If all is OK, the transactional lender will lend $100,000 plus closing costs for the wholesaler to purchase the property. Then the same day or next day, the end-buyer purchases purchase the property for $120,000. The transactional lender will receive $100,000 plus their fee. The wholesaler will receive $20,000 minus closing costs minus transactional lender fee.
Benefits of Using Transactional Funding
- With a double closing, the investor can keep a clear separation between the seller and the end-buyer, which reduces the opportunity for both parties to cut the investor out of the deal.
- Transactional funding is typically for 100% of the purchase price. The investor doesn’t have to put down any of their own money to complete the deal.
- The speed of implementation is often the difference between landing a deal and missing out on one altogether
- Transactional funding can be used for any type of property—vacant land, single or multi-family homes, condos, REOs, and all types of commercial property.
- Transactional lenders usually don’t require title insurance or appraisals. This speeds the process and less fees for the wholesaler
- Transactional loans are usually asset-based loans, which means the lender qualifies the borrower based on the home, and not traditional qualifications like credit score or debt-to-income ratio.
Limitations of Transactional Funding
- Transactional funding is very short-term; with most lenders requiring full repayment within 1 – 3 days (some transactional lenders will offer extended terms at a higher rate).
- Some title companies may not be willing to work with double closing transaction
- If the deal doesn’t close in the agreed-upon timeframe, additional fees and interest can get expensive.
- Double closings may not be as efficient as contract assignment strategies
How Much Does Transactional Funding Cost?
The cost of transactional funding can vary from lender to lender. Most lenders will charge somewhere in the neighborhood of 1% to 3% of the loan amount. To put things into perspective, a $100,000 loan could end up costing wholesalers anywhere from $1,000 to $3,000.
The fees associated with a transactional funding loan can vary based on the loan amount, the length of the term, and how risky the lender perceives the deal to be. It can cost more if the term extends longer or other risks come into the picture. It ultimately depends on what the lender and borrower negotiate.
A transactional lender typically expects to be repaid within 1 to 3 days (sometimes up to a full week), although there are some lenders who offer extended transactional loans for longer.
For example, when I have done transactional lending for people that I know, I have charged a flat fee or a percentage plus 12% annualized interest. If an investor borrows $150,000, the cost of the loan would be $3,000 plus $49.50 per day in interest.
For more on transactional funding check out our video https://youtu.be/kCbwtS3VKw4