Have you ever wanted to get started in Real Estate but felt like you didn’t have the funds to get your foot in the door?
Have you ever wished there was a way to use other people's money to get your first deal?
In this guide, we will go in-depth on what exactly Transactional Funding is, how it works, how to find these lenders, and how you can benefit from it as a real estate investor & wholesaler.
Here's what we'll cover in The Ultimate Guide For Transactional Funding:
1. What Is Transactional Funding In Real Estate?
2. Who Uses Transactional Funding?
3. 5 Benefits of Using Transactional Funding As An Investor
4. How Does Transactional Funding Work For Wholesalers (Step-by-Step)?
5. Transactional Funding & Double Closing Example
6. How Much Does Transactional Funding Cost?
7. How To Find Transactional Funding Lenders?
8. Can I Use Transactional Funding For An Earnest Money Deposit [EMD]?
9. Alternatives For Transactional Funding?
Transactional funding refers to short-term capital investors borrow to complete real estate deals. Essentially, this funding is very common in real estate deals that involve wholesalers because it is used to fund transactions where the purpose is to immediately resell a property to an end buyer. This particular process is also known as a simultaneous closing.
Other names for Transactional funding are "short-term funding," "flash funding," "same-day funding," or "ABC Funding."
This form of funding is popular with real estate investors and wholesalers who want to buy property without using their own funds. Transactional lenders will typically lend to investors as long as there’s an end buyer willing to buy the real estate property from the original investor in a short period of time, usually 1 to 14 days.
When these types of transactions are done properly, it can allow a real estate wholesaler to earn a significant amount of profit without ever having to put their own money into a deal.
The purpose of transactional funding is to be extremely short-term with some loan lengths even being minutes, or hours!
Until recently, real estate investors would often pass the financing from the end buyer to purchase the original property through back-to-back closings.
Meaning, investors would find a solid deal they wanted to buy, put it under contract, and open escrow for an "A to B" transaction. Then, they'd sign a second contract with the new buyer for a higher price and open a second escrow for a "B to C" transaction. Then, the investor would use Party C's funds to fund the first A-B transaction. Then, the investor would immediately sell the property to the C buyer in the second B-C transaction.
This savvy process allowed the investor wholesaling the deal (Party B) to not have to bring any funds to close the deal and earn a nice profit while doing so.
However, much changed when the real estate bubble burst. Lenders and title companies now have more stringent lending policies, and in many jurisdictions you cannot use the end buyer's funds (Party C) to fund the entire transaction.
Many title companies now require that the first closing be a standalone transaction where Party B has to fund the A-B purchase before the property can be resold to the end buyer (Party C). As a result, transactional funding is a well-needed type of financing for real estate investors and wholesalers in order to legally complete these types of deals.
Let's get into who uses transactional funding, and how it can help benefit your business!
This funding is ideal for any real estate investor that needs temporary funds to close a deal. As mentioned, it's also ideal for real estate wholesalers with signed contracts that have to close on a deal before wholesaling it.
If you're a real estate investor that deals with motivated seller leads, short sales, probates, REOs (bank owned properties), and other distressed properties, then this funding is great to have in your tool belt.
Particularly when dealing with short sales and REOs there can stipulations that require you to officially close and buy a property before wholesaling it to another person or company. This is where transactional funding can play a key part in your real estate business.
There are a multitude of reasons on why you want to use transactional funding as a real estate investor. Below we'll go over 5 benefits of using transactional funding for real estate investing.
This is a huge benefit because when you deal with hard money lenders, banks, and even private money lenders - they usually won't always fund 100% of the deal. Keep in mind that most transactional lenders will only fund a deal if, and only if, you have the end buyer ready to purchase the property.
This means you typically do not have to provide a proof of income, fill out all of the paperwork you would need with a traditional lender, or have your credit checked. This is beneficial if you have bad or poor credit, and little to no income.
Double closing is the back-to-back property purchase and sale involving the original seller, the original investor (wholesaler), and the end buyer. By using a third-party transactional funding lender, you'll be able to use their funds instead of your own to close the deal.
This is called leveraging "Other People's Money" (OPM). Using OPM is an important skill to have as a real estate investor. This way you can use their money to fund and close on deals, and use your own money to keep your business running.
Transactional funding companies are in the business of lending capital and acting quickly. A lot of times, investors will need the funding in 24 hours to within a couple of weeks time. Transactional funding lenders are used to these short time frames and are able to act with speed.
If you're looking to wholesale a real estate deal, but the contract is non-assignable, then in most cases you'll be able to close on the deal with transactional funding and immediately re-sell it. Utilizing transactional funding provides another exit strategy for wholesalers to receive profits from their deals.
The process is fairly simple for using transactional funding. The steps below highlight the basic outline on how the process works.
Step 1: A Wholesaler will identify an ideal property of interest.
Step 2: The Wholesaler will request a Proof of Funds Letter from their transactional lender.
Step 3: The Wholesaler will now execute both their buy contract with the property owner and the sell contract with their potential cash buyer.
Step 4: The Wholesaler will notify the transactional lender and request for the transactional funds.
Step 5: The Wholesaler uses the transactional funding to purchase the property, then the end buyer buys the property. The transactional loan is then immediately paid in full with interest, and the wholesaler collects the profit.
Here's a quick video going through the process:
This process is also called an "ABC transaction." This is because the original investor ("B") gets the property under contract with the seller ("A"), and quickly sells the property to the end buyer ("C").
Here's an example of how transactional lending works for a double closing:
The cost for using transactional funding will vary depending on how much money is required, the length of time the money will be borrowed for, and the amount of risk in the deal.
Most transactional lender fees will charge an origination fee of two or three points (2-3% of the total loan amount), plus 10% to 15% percent interest annualized of the total amount borrowed. However, the annualized interest is usually only significant if the capital is borrowed for a long period of time.
For example, if you borrow $100,000 from a transactional money lender for less than a day, then you may only have to pay the origination of 2%, which in this case would be $2,000.
However, if you borrow the funds for, let's say 60 days, then you will have to pay annualized interest on that borrowed money. To give you exact numbers, if you borrowed $100,000 at a 10% annualized interest rate for 60 days, then you would have to pay $166.67 of annualized interest in addition to the 2% origination fee.
This is a small price in order to complete and profit from these deals!
The purpose of transactional funding is to be extremely short-term. It's the transactional lenders intention to lend out their capital for as little time as possible to reduce their lending risk exposure.
Ideally a transactional lender wants to only have their capital be lent out for minutes, or hours. However, some transactional funding companies have loan terms that allow you to borrow capital for 1-120 days.
Yes, some transactional lenders allow you get extended funding in cases when you cannot close by the agreed upon time frame. This time extension may be up to 30 or 90 days, but is dependent on the terms of the actual transactional funding company you are using.
Keep in mind that the longer you take to close on the resale of the property, the higher the interest rate and fees you will pay.
In most cases, all that you need to qualify for this funding is to have organized documents, such as executed contracts. Basically, this funding requires a property seller (A), you (B), and a ready, qualified end Buyer (C).
Easy qualification for this funding makes it appealing to most investors. The process can be typically be completed within one to a few days because borrowers are not required to submit the amount of documents they'd have to for a traditional loan. Transactional funding can usually be acquired without the paperwork of: appraisals, credit verification, proof of income, and job verifications.
As you can see, this is part of what makes transactional funding differ greatly from a traditional type of financing, like a 30 year mortgage from a bank.
Quick Reminder: Transactional funding approval is based on the property and strength of the deal rather than credit!
Here are three ways to find the best Transactional Funding Lenders in your area:
1. Attend Your Local REIA Meetings
REIA (Real Estate Investors Association Meetings) are local events where those in the real estate investing industry go to network and get more business. If you attend these meetings, you'll be able meet different types of lenders and financiers who want to lend out capital on real estate deals.
2. Use Google Search
To find transactional funding lenders on google, just go to the search and type in " 'Your City Name' + 'Transactional Funding' "
Now you'll be able to go through the search page results to contact and find transactional funding lenders near you. It's hard to beat good ol' google!
3. Get Referrals From Your Network
Ask your network if they know of any transactional funding lenders. If your network does not, then the next step is to ask your network if they know of any traditional, private, or hard money lenders. Once you get in contact with the traditional, private, or hard money lender, you can then ask if they perform transactional funding or know of anyone else who does.
By following these steps and by asking the right people in your network, it should lead you to finding transactional funding lenders!
Yes, of course! You can use transactional funding on a house, which is why it's used by wholesalers and home flippers. The fact that qualifying for this funding is easy and fast makes it ideal for the purchase and sale of a house.
You can use transactional funding for all types of property, such as:
Earnest money refers to the deposit that is made to the seller as a representation of the good faith of a buyer to purchase a home. This money allows the buyer more time to secure financing and perform a search for the title, get an appraisal, and inspect the property before closing.
An earnest money deposit is usually delivered after signing a purchase agreement or sales contract. An escrow account holds this deposit until the property is fully closed on.
Sometimes a home owner or investor may not have cash or capital access to fund an earnest money deposit. In this case, they can use transactional lending to get the required earnest money deposit for the property they want to invest in and buy.
Yes, transactional funding can be used in the sale of commercial real estate, businesses, even specialty assets like collectibles or fine art.
The type and source of a property that you buy usually isn't the issue. The most important thing while using transactional funding is for the transactions to be back-to-back, completed as soon as possible, and be free of seasoning requirements from the seller of the original property.
Keep in mind that transactional funding should not be looked at as a "long term" type of financing.
Let's get into the alternatives to transactional funding in case you need funding for a longer time period!
Transactional financing may not be ideal for you if you can’t time the closing properly or you don’t have the liberty to choose a closing agent. As previously mentioned, some lenders can provide extended transactional funding of usually for 30-60 days though most lenders expect borrowers to close on the resale of the property in a much shorter time frame.
There is a time and place for each type of real estate investment financing. If transactional funding isn’t ideal for your particular transaction, then you can consider other types of real estate financing for investment property, such as:
These sources of funding do not require an end buyer to be lined up before providing their financing. However, hard money lenders & banks usually have higher fees and have more stringent demands for underwriting. Each hard money lender is different, but they may need proof of income and put you through a credit check, proof of certain assets, and experience. They will also do their due diligence on insurance, valuations, and title.
On the other hand, a private money lender and JV partner can be more flexible and provide negotiable terms. Their requirements will depend on what is possible to work out.
In order to become a successful real estate investor and wholesaler, it's wise to continue developing relationships with all types of lenders. You never know when you will need a particular type of financing, like transactional funding.
From finding and developing relationships with transactional lenders, you'll always have an exit strategy when funds are needed in a short-time frame. When non-assignable contracts come across your plate for properties that you want to wholesale, you'll now be able to easily complete the deal through a double close with transactional funding.
As with anything in real estate investing, there's always risk that comes with it. However, as an investor we take calculated risks in order to receive profits from the deals we complete.
When a deal is profitable enough to offset the risk & cost with transactional funding, then it's a wise & calculated decision to use this transactional funding to grow your real estate investment business!
Hope you enjoyed the Ultimate Guide For Transactional Funding!
Cheers & Happy Investing!
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