TRANSACTIONAL FUNDING is what you need if:
You don’t have enough capital to buy a property on your own.
Or perhaps you need to obtain a bridge loan but don’t have the required down payment.
Also known as flash funds and AB-BC funding, transactional funding is a same-day loan that real estate investors use to close deals.
The biggest reason why transactional funding is sought-after is because it gives real estate investors with low capital the ability to close deals which they wouldn’t be able to close otherwise.
It also enables destressed homeowners to meet down payment requirements when seeking a bail-out bridge loan.
Borrowers get the funds they need fast and easily.
Lenders earn 1% to 10% interest in under a week.
How Does Transactional Funding Work?
To understand transactional funding, you must first understand how double closing works. Usually, there are three parties involved in a double close scenario:
Party A – The property seller
Party B – The wholesaler (real estate investor)(LLC purchasing from owner)
Party C – The end buyer of the property
Party B buys the property from Party A and sells it to Party C.
The name “double closing” comes from two simultaneous transactions taking place in this scenario.
So, where does transactional funding come into play? Well, Party B applies for transactional funding to purchase the property from Party A, and then Party B sells the property to Party C. (Typically the case with wholesaling.)
The proceeds from this second transaction “C”, is used to repay the transactional loan; what’s left is the profit from double closing.
The transaction is performed through the title / escrow company. The transactional lender’s money is never at risk. The money never leaves the escrow account until closing. At closing, the transactional lender receives back 100% of his loan along with the agreed upon interest and fee. If for any reason the real estate transaction fails to close, the funds are returned directly to the transactional lender.
Distressed borrowers:
Property owners who have defaulted on their mortgage payments may have a difficult time refinancing their property, especially if it’s in foreclosure. To avoid sheriff Sale, the property owner will need to obtain a hard money “Bridge Loan” to quickly pay off the note which is in default.
Note – hard money lenders (HML) do not care about the credit worthiness of the borrower provided there is enough “Equity” in the property. The HML will typically loan 65% of the property value. But there is a catch. Bridge loans require the borrower to put down 35% of the property value. This is because the lender must be able recover 100% of their money if the borrower defaults, again.
Here is an example:
Let’s say a property is valued at $100,000. The homeowner owes a balance of $50,000. For whatever reason, the loan went into default. The homeowner now must pay off the $50k balance. Even though the property is valued at $100k, the HML will only lend 65% of the $50k. Therefore, the homeowner will need to make a down payment of 35% of $50k ($17,500).
If the homeowner does not have $17,500 to put down, the money must then be borrowed. The down payment is borrowed from the “Transactional” lender. But there is a problem. The transactional lender wants to be paid back at the closing table. Therefore, to have enough money to pay off the note in default and pay the transactional lender, the property must have enough equity.
In this example the property was valued at $100,000. Therefore, the homeowner will request a bridge loan for $100,000. The hard money lender will loan only 65% of the property value and require that the homeowner has skin-in-the-game, and therefore make a down payment of 35% ($35,000).
The loan of $65,000 is enough to pay off the $50K note in default, pay closing costs and pay back the “Transactional” lender.
Here’s how it looks on paper:
1) Requested loan $100,000.
2) Amount borrowed from hard money lender $65,000.
3) Amount borrowed from transactional lender $35,000.
4) Total funds deposited with title/escrow $100,000.
At the closing table:
5) The original note is paid-off, $50,000.
6) The transactional lender is paid $38,500. ($35,000, plus 10% - $3,500)
7) Title & Closing costs $6,500 (10%)(possibly less)
8) Total paid out $95,000.
9) Homeowner keeps $5,000.
Why Choose Transactional Funding Over Bank Loans?
When you apply for a transactional funding loan, all the lender requires are copies of the relevant buyer-seller contracts. You don’t have to go through any credit check or put up a down payment. Transactional funding is quicker and hassle-free than a regular bank loan.
Once your loan application is approved, you receive the funding immediately, usually on the same day. And unlike a regular bank loan, you won’t be charged any interest for transactional funding. Instead, the lender charges a nominal fee plus a small percentage of the amount lent as a lending fee.
Who Is Eligible for Transactional Funding?
Eligibility is another factor that distinguishes transactional funding from regular bank loans. To secure a traditional loan, you’ll have to get a lender to assess your credit score, income profile, and other factors before being approved. On the other hand, there’s a low eligibility threshold to receive transactional funding. If you buy and sell the property on the same day with the same title company or escrow attorney, you can get flash funds from a transactional lender.
In most cases, the only documents you’ll have to submit are copies of the relevant buyer-seller agreements. You do not have to provide any other details, and there’s no stringent credit check. Appraisals, title reports, etc., will not be necessary.