Transactional Funding For Real Estate Investing
Transactional funding continues to be the fastest and easiest way for most real estate investors to finance their wholesale house deals and flips. It is also one of the least well-known forms of real estate funding. How does it work? When should you use it? When won’t it work?
What is Transactional Funding?
Transactional funding is a specialized type of financing for real estate. It is ideal for those looking to do quick house flips or wholesale deals. It is best known for being easy to qualify for and fast for funding deals. This is typically a very short term lending solution for those who plan to be in, out and paid on real estate deals quickly.
Many might think transactional funding is too good to be true, until they use it for themselves. Though there is one major quirk investors need to know about.
Quick History of Transactional Funding
The term ‘transactional funding’ was probably unheard of by most before 2008. It is really one of the most exciting and positive things to have come out of the housing and financial crises.
Since then several dedicated transactional funding lenders have popped up, and have become invaluable to real estate investors, the industry and the economy.
Prior to that, this type of funding was really exclusively available to connected real estate investors who knew private lenders and individuals with lots of cash to loan. Those were the investors who were doing fast flips and wholesale deals at great volumes. They could flip hot properties for $100,000 gross profits, all month long. In, out and paid.
Transactional Funding and Real Estate Wholesaling
Transactional funding is almost exclusively used for wholesaling real estate. That is fast house flips, where investors immediately turn around properties without doing any rehab work.
Without funding, real estate wholesalers have had two main choices:
- Pay cash and resell quickly
- Assign the contract for an assignment fee
Not every investor has the cash. Whatever cash they do have limits them on the amount of deals they can do. Assigning real estate contracts can be great. However, it can limit the potential profit. It also puts investors are great risk of losing deals.
In the past some investors double closed real estate deals using their end buyers’ funds. However, that is now illegal in many jurisdictions. You must now assign and flip the contract, or have two separate closings with their own funds.
Transactional funding solves this by giving investors the cash they need to close on the buy side, and allowing them to resell for a profit in a separate closing.
Why Use Transactional Funding
This type of funding enables investors to conduct legal back to back closings, while protecting the privacy of the deal with the original seller, and preventing either seller or end buyer from being tempted to try to cut out the investor. That means you can also make a lot more on these deals than with assignments. Many end buyers, including investors are going to balk at you trying to make $50k or $100k on an assignment. They might be okay with $5,000, but why leave so much money on the table if you don’t have to?
Transactional lenders typically aren’t going to require full title reports, insurance or appraisals either. That cuts down on transactional costs, leaving more profit, and speeding up the process. Transactional lenders normally claim to fund transactions in a matter of days too.
Best of all, transactional funding usually provides 100% financing, and virtually no personal qualifying. You don’t need to have your credit checked, prove your job or income, assets or worry about debt-to-income ratios. That not only means a lot less headaches, but less risk of the deal falling apart, and no damage to personal credit.
The one big catch is that you need to have an end buyer already lined up. You have to prove you have a cash buyer or a buyer who qualifies for financing. Be sure your end buyer and their mortgage broker are aware this is a flip. Some loan programs may have an issue with the short turnaround time. Others won’t care providing a copy of the deed in your name is provided by the time the second closing happens.
Extended Transactional Funding
Transactional lenders normally offer their funds for a few days. They will expect you to have closed on your resale within about 3 days. Some have provided extended funding for as long as 30 days, and even up to 1 year. Just expect that will come with more fees and a higher interest rate to cover their increased exposure to risk too.
Alternatives to Transactional Funding
Other options for funding fast flips and wholesale transactions include:
- Hard money lenders
- Private money lenders
Neither of these funding sources may require an end buyer is already lined up in advance. Though hard money lenders in particular can be substantially more expensive, and may have far more stringent underwriting demands. They will want to see your money on the table, a.k.a ‘skin in the game’. They will want credit checks, proof of some types of assets or experience, and will do more due diligence on title, insurance and valuations.
Private money lenders can be far more flexible, with openly negotiable terms. What they want will all depend on what you can work out. Use REWW’s system for finding private lenders now. Or get training and become a Certified Private Lending Specialist through the REWW Academy.