Welcome to the labyrinth of real estate finance, where buzzwords like “hard money,” “bridge loans,” and “private lending” reign supreme. It’s easy to get lost in this maze, but fear not!
Today, we’re talking about a lesser known but incredibly impactful term: transactional financing. This is the lifeblood of quick, effective real estate deals… and it’s about to become your new best friend.
What Is Transactional Funding in Real Estate?
Well, think of transactional financing, as a financial shot in the arm. It’s short term, powerful, and designed to keep things moving swiftly.
This form of funding is particularly popular in the wholesaling sector of real estate.
Why?
Because it’s ideal for those looking to acquire and immediately flip properties.
Transactional financing is essentially short-term capital that investors borrow to close deals. Unlike your average mortgage, we’re not talking about 30-year commitments here.
Oh no, some of these loans are as short as a few hours or days! It goes by many names: “flash funding,” “short-term funding,” and “same-day funding,” to name a few.
The reason for its popularity?
Simplicity and speed. Most transactional financing loans are approved within a 24- to 48-hour window.
So if you find a property today, you could technically own it by the weekend, thanks to transactional financing. Plus, there’s no need for a credit check. What a time to be alive, right?!
How Does Transactional Funding in Real Estate Work & Specifically for Wholesaling?
Ready to jump into the fast-paced world of real estate wholesaling?
Good! Because transactional financing could just very well be your new go-to strategy.
So, here’s the breakdown without the financial heartbreak.
- Identify That Winning Property: First off, a wholesaler finds a property worth investing in. It fits the criteria: good location, fair price, and high resale potential.
- Secure a Proof of Funds Letter: Next, you’ll need to request a Proof of Funds Letter from your transactional lender. This document basically says, “Yes, this person is good for the money.”
- Double Up on Contracts: With the Proof of Funds in hand, you now set up 2 contracts. One is your agreement with the property owner, and the other is with the end-buyer. No dilly-dallying here — efficiency is the name of the game.
- Get That Funding: Call up the transactional lender to let them know it’s go-time. You’ll need to request the funds to keep this real estate train moving.
- The Grand Finale: Use the transactional funds to buy the property. The end-buyer swoops in to complete the purchase, repaying the transactional loan. The difference between what you paid and what you sold it for = your profit.
Transactional financing is the straight shooter in the real estate world…
No need for personal funds or credit checks — just a smart strategy and a quick turnaround.
And if you think that’s clever, just wait until you see the profits roll in. That’s the power of transactional financing!
Pros & Cons of Transactional Funding in Real Estate
Transactional financing can be a game-changer for real estate investors, but it’s not without its challenges. Let’s break down the pros and cons to give you a well-rounded view.
Pros:
- 100% Funding of Purchase Price: Traditional lenders often leave you scrounging for the remaining percentage of a deal’s cost. In contrast, transactional financing covers 100% of the purchase price as long as you have an end-buyer ready to go.
- No Tedious Paperwork: Forget about credit checks and income verifications. The strength of the deal is what counts here, making this an excellent choice for those with less-than-stellar financial histories.
- Double Closings Made Easy: With transactional financing, you can close with the original seller and the end-buyer back-to-back without dipping into your own pockets. This effectively leverages external funding to keep your operations smooth.
- Quick Closes Are the Norm: Need funds in a jiffy? Transactional financing lenders are known for their speedy processes, making them ideal for quick-turnaround deals.
- Non-Assignable Contracts, No Problem: Even if the original contract forbids assignment, you can still close and immediately re-sell the property, offering a versatile exit strategy.
As with any real estate venture, there are always going to be some roadblocks that pop up along the way. In the realm of transactional financing, these include…
Cons:
- End-Buyer Required: The convenience of no credit checks comes with a catch — you need an end-buyer lined up, often with signed contracts and property photos as proof.
- Short Repayment Timelines: Be prepared for a sprint, not a marathon. These loans usually have tight repayment schedules, sometimes as short as 2 to 3 days, but generally within 14 days.
- Costly Delays: Any delay in closing can translate into rolling interest rates, ramping up your repayment amount.
- Limited Lender Acceptance: Not all title companies or closing agents are open to transactional financing, potentially complicating or derailing your deal.
- Hidden Costs: Beyond the loan amount, expect to encounter various fees, from up-front costs to interest rates and even penalties for late repayment.
- Risks for the Inexperienced: Newcomers may find themselves in hot water if they can’t navigate the complexities of transactional financing, including tight timelines and potential penalties.
Whether you decide transactional financing is the right strategy for you depends on your investment goals, risk tolerance, and level of expertise. If you’re ever unsure, don’t hesitate to speak with a transactional financing professional.
How Do I Qualify for Transactional Funding in Real Estate & What Does It Cost?
Alright, eager investor, qualifying for transactional financing is relatively straightforward. There are just a couple of items to secure. Here’s your checklist:
- Organized Documents: Have your contracts executed and in order with the property seller (A), you (B), and a qualified end-buyer (C).
- Minimal Paperwork: This isn’t your typical loan process. You can leave your credit score and job verification at the door. No need for appraisals, proof of income, or a stack of other financial documents.
Now, let’s talk costs…
Transactional financing costs can vary depending on several variables: loan amount, length of the loan, and risk involved. Expect an origination fee around 2% to 3% of the total loan amount and an annualized interest rate between 10% and 15%.
How’s about a quick math class to make these details tangible?
So, for example, if you borrow $100,000 for less than a day, you could be looking at just the origination fee of 2%, or $2,000.
But let’s say the loan extends to 60 days. Now you’re also paying annualized interest. Using a 10% rate as an example, that would add $166.67 to your costs on top of the 2% origination fee.
So yeah, time is quite literally money in this scenario.
Alternatives to Transactional Funding
Transactional financing is slick, no doubt, but it’s not the only game in town.
If the timing doesn’t line up or you don’t have flexibility in choosing a closing agent, you might want to look elsewhere, such as:
- Bank loans
- Hard money loans
- JV partners
- Private money loans
If transactional funding doesn’t work for you, there’s a financing option for every type of investor and every kind of deal. It’s all about picking the one that fits your business.
The Last Word on Transactional Funding
From the lightning-fast approvals to the blissful absence of credit checks, transactional funding is, indeed, a treat for the time-strapped and the entrepreneurial.
But let’s not forget: Like any financial venture, you need to think about tight timelines, possible hidden fees, and the necessity of having an end-buyer at the ready.
Transactional funding is certainly versatile, but it is best used by those who understand its intricacies — and hopefully, we’ve done you a solid with this here informative post
Now go out there and get some deals!
