The average consumer may not have ever really thought about transactional lending or even what it is. When it comes to financing real estate, most activity and interest is focused on regular mortgages and their interest rates. However, investors have very different requirements, especially when they’re engaged in fix & flip or wholesaling.
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Transactional Funding is Alive and Well
1. Transactional Funding is Alive and Well
The average consumer may not have ever really thought about transactional lending or even what
it is. When it comes to financing real estate, most activity and interest is focused on regular
mortgages and their interest rates. However, investors have very different requirements,
especially when they’re engaged in fix & flip or wholesaling.
So, what is transactional funding?
Transactional funding is very short term lending to facilitate a real estate deal. Fix & flip
investors and real estate wholesalers both need this type of funding unless they happen to be cash
rich. Let’s talk about wholesalers first. They normally locate deep discount properties that they
can flip to another investor without any rehab work on the property. They are profitable only if
they are very good at locating distressed owners or foreclosure/pre-foreclosure properties before
the competition gets wind of them.
If they want to totally control the property and increase their profit, they enter into a purchase
contract and actually commit to buy the property. They have their buyer lined up, usually
another investor, perhaps a rental property buyer. Their goal is to commit only the earnest
money required by the seller to lock up the purchase, and then they want some transactional
funding to close the purchase. They schedule their buyer’s closing later the same day or maybe
the next day, and the transactional funds are required to actually buy the home so that they can
sell it at the second closing.
The transactional lender provides the funds to buy the home at the first closing, and they collect
their fees and get their loaned money back at the second closing. Fees are substantial, and many
2. deals require somewhere between $2,000 and $5,000 in interest and fees for the use of the money
for the short period between closings. However, the wholesale investor can normally get more
for the home in this type of transaction, and they factor those fees into the deal when they offer it
to their investor buyer.
The fix & flip investor has a very different time span for their loan, as they are going to take
ownership of the home and then complete rehab and repairs on the home before it is sold, again,
normally to another investor. Fee structures change a bit, and the short term lender may charge
lower fees, but their profit is increased by the interest on the loan until the home is sold. This
can be for weeks or months while the work is completed. Even if the cost of this type of loan is
high, fix & flip investors, at least the good ones, enjoy higher profit margins. They make money
on the home, as well as on the rehab work they do to bring it up to marketable condition.
Where do you find these lenders and what do they require for a loan?
Investors can locate transactional lenders through local real estate investment clubs, or a quick
search on Google yields a great many companies in this business. One lender’s website makes
the process sound simple:
This is simple. A one to three day, back-to-back real estate transaction funding involves 3
parties and 2 stand-alone closings.
"A" - Seller
"B" - Investor
"C" - End Buyer
"A" sells to "B" (AB Closing) and "B" sells to "C" (BC Closing)
This is pretty much how it works. The lender’s risk isn’t really tied to anything like the
investor’s credit history or their personal debt load, unlike the normal mortgage lender’s
concerns.
For wholesalers, transactional lenders are concerned with the value of the home as it exists when
purchased. They will limit the funds loaned to an amount below value that will cover them
should the final buyer (C in our example) disappear and the lender must take the property and
sell it. For fix & flip investors, the lender will also consider the ARV, After Repair Value, of the
home, as well as the experience level of the fix & flip investor and their previous successful
deals. They will issue “proof of funds” letters for investors to use in putting deals together.
For people looking to enter real estate investing using short term strategies, transactional funding
will be of interest, and there is plenty of availability for those who do their research. Carefully
consider all of the terms and conditions, as well as the total of fees and interest.