Transactional funding has quickly become one of the most trusted sources of capital for real estate wholesalers. In as little as one decade’s time, transactional lending has ascended the ranks of capital financing and helped an entire generation of wholesalers secure deals they would have otherwise had to pass on.
Access to quick capital is an advantage for investors of every level, which begs the question: What is transactional funding? Better yet, what does transactional lending mean for today’s investors and how can they use it to their advantage? Keep reading to find out.
Transactional funding is a creative financing strategy used by investors to facilitate what the real estate industry has come to know as a “double close.” Also referred to as “same-day funds”, transactional funding is best suited for deals that involve a non-assignable contract held by a bank, or any other situation where more than one transaction may be required to close on a deal.
Transactional funding is best suited for short-term real estate deals where the buyer needs funds to close on a deal and resell it for a profit in a separate closing. In other words, transactional funding allows investors to get in an out of deals quickly by creating two separate deals.
Short sales, for example, will require prospective buyers to complete a total of two transactions before they are able to acquire a property. Thanks to transactional funding, buyers may satisfy the bank’s invested interest in a property first, and proceed to participate in a subsequent transaction to purchase the property. It is worth noting, however, that transactional funding is perfectly suited to facilitate wholesale deals, as it grants investors the ability to quickly buy and sell in a short period of time without having to rehab.
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Transactional funding is almost exclusively used to wholesale properties through the double close method. It gives investors the cash they need to simultaneously secure a deal from a seller and permits them to resell it for a profit in a separate transaction. Perhaps even more importantly, however, is the versatility transactional funding awards today’s real estate investors. It serves as a replacement for when assigning contacts isn’t permitted by local authorities. When it’s not possible to assign a contract, 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.
While transactional funding has proven invaluable to seasoned wholesalers, there’s one caveat: transactional funding for real estate wholesale deals 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. That said, wholesalers will need to disclose their position and exercise transparency. Investors must make sure the end buyer and their mortgage broker are willing to participate in a deal that is counting on a double close. Not all loan programs condone the practice of double closing, so it’s important to make sure they are ready and willing to participate before moving forward.
Using transactional funding to flip houses will supply investors with the funds to quickly purchase a wholesale deal, only to turn around and sell it quickly without any thought of rehabbing it. It is worth pointing out that double closings funded by transactional lending are relatively fast; they may close in as little as a few days, or even hours. However, some double closings may take as long as a few weeks. That said, they aren’t all that different from traditional home purchases; they are just executed at a much faster pace.
As their names suggest, double closings will require two transactions to take place. The first transaction (Transaction A) takes place between the original homeowner and the wholesaler. The second transaction (Transaction B), on the other hand, will consist of the wholesaler selling their new asset to an end buyer. To be perfectly clear, both of the transactions will have their own escrow and settlement statements. Meanwhile, the wholesaler will take legal possession of the asset prior to selling to the end buyer. The investor will show up on the chain of title and, of course, be required to pay the expenses that have become synonymous with buying and selling properties (escrow, closing costs, etc.).
Transactional funding has developed a reputation for helping wholesalers execute double close strategies. However, not unlike every other source of capital, even the best transactional funding has limitations. Investors should, therefore, compare what transactional funding has to offer with its limitations, and make their own decisions on how to proceed. To gain a better idea of the forces working for and against transactional lending, here are some important things for prospective wholesalers to weigh.
Transactional funding can often be had and acquired in as little as a few days, or even hours.
The speed of implementation awarded to investors through transactional lending is often the difference between landing a deal and missing out on one altogether.
Transactional funding allows investors to be in and out of deals quickly, which will allow them to move on to the next deal a lot faster than many other real estate exit strategies.
Transactional funding will traditionally fund 100% of the deal.
Transactional lenders typically don’t require full title reports, insurance or appraisals, which simultaneously increases profit margins and speeds up the process.
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.
In order to receive transactional funding for real estate deals, investors will typically need to have an end buyer lined up already.
Not only will wholesalers need an end buyer, they’ll need one who already qualifies for financing.
Not all loan programs are comparable with the short turn-around times associated with double closings.
Double closings are not as efficient as contract assignment strategies.
The cost of transactional funding can vary dramatically from lender to lender, and depends entirely on the parameters they are comfortable operating within. However, it’s safe to assume that most lenders will charge somewhere in the neighborhood of 2% to 12% of the original loan amount. To put things into perspective, a $100,000 loan could end up costing wholesalers anywhere from $2,000 to $12,000.
Transactional funding is a unique and highly specialized source of capital. It is uniquely designed to help wholesalers perform double closings while simultaneously prioritizing efficiency and speed. As a result, transactional lending belongs in every wholesalers arsenal of financing tools. At the very least, an additional source of capital may decide whether or not they land their next deal.