What is Transactional Funding?
Transaction funding can be one of the quickest ways to fund and complete a wholesale transaction, but it is often misunderstood by both new investors and even some who have completed many deals.
Because it is only needed for a specific type of transaction many investors, even veteran investors, do not understand it.
It is typically used as a very short term solution when you want to be in and out of your transaction quickly, and get paid so that you can move on.
This type of funding really gained traction after the housing and financial crisis of 2007-09.
How Does Transactional Funding Work?
From time to time as a real estate investor you will have the need for a double closing, or a simultaneous closing. A double or simultaneous closing is when you are buying and selling the home in the same day. So for example you as the investors have put the property under contact with Seller A and you are going to sell the property to buyer C.
Seller A > You are Buyer B and also You are Seller B > End Buyer C
You can sell a property in this manner but you need to have your own funds to complete the transaction. Meaning you cannot rely on the funds from the End Buyer C to be able to close the transaction. This is also commonly said that the transaction has to stand on its own and not rely on the End Buyer C. Because your obligation to purchase the property as Buyer B is not conditional on the End Buyer C purchasing the home. Therefore you need to have the ability to purchase the home even if the End Buyer C does not perform.
To do this you need to work with a transactional or simultaneous closing funding. Transactional funders are not looking to the value of the real estate, they are looking at the likelihood that the Buyer C will be able to purchase the home from you if they lend. So they are not looking towards property values. As you know here at DoHardMoney we look almost exclusively at the value of the property rather than the transaction. Transaction lender is doing just the probability. They are looking for the strength of buyer C.
Also Transactional funding is very short term. Typically term is 1-2 days and at most a week. So you need to be confident that the end buyer is really going to perform.
Transactional Funding and Wholesale Real Estate Investing
Transactional funding is almost always used only in the course of completing a specific kind of wholesale real estate deal, one that is completed within just a few days. this is sometimes called fast house flipping. this type of transaction is rare, particularly in the current market.
Wholesalers most commonly use transactional funding for two scenarios:
1. If a wholesaler has a contract that isw not assignable to a third party. This is often the case when working a deal on a property off the MLS or REO properties. They have a contract that is NOT ASSIGNABLE to a third party. It might also be useful when acquiring properties that are owned by Fannie Mar, HUD, FHA for example.
2. The wholesaler is choosing not to assign the contract in order to maximize their wholesale markup. Many times end buyers will not purchase a property if the assignment fee is too high. You do not have to disclose your contract details to the end buyer when you utilize Transactional Funding.
Do You Need Transactional Funding?
Whether or not you need to obtain transactional funding depends upon your specific deal and the laws in the area. Many times investors think they need this type of funding when they do not. The way you structure your contracts and negotiate terms will have a lot to do with whether or not it is necessary. There may be changes you can make to your planned transaction that will make the need for transactional funding go away. You will want to check with the laws of your state and any applicable municpal regulations, because it often has everything to do with the timing of various steps in the deal. Understanding how the laws in your area are worded and how the definition of some real estate terminology is interpreted may be useful as well.
How Can Do Hard Money Help?
If you think you might need transactional funding, but are not certain, please let us review your deal. We want help you with hard money loans for real estate. Most of the house flips we fund have no need for transactional funding.