It is all about timing in the fast-paced world of real estate. For most investors, there is often a need to lock in a profitable deal. These deals involve money urgently, and this is where transactional funding or flash financing can be beneficial.
Transactional funding is an all-inclusive short-term loan tailored to real estate transactions. It enables investors to get cash fast without using their personal funds or traditional financing. (Read also transactional funding 101.)
What Is Transactional Funding?
Transactional funding is a unique short-term loan, usually for a few days’ duration, and frequently within 24 hours of application. This form of financing is unlike traditional funding, which may take weeks before it is closed. Transactional funding is strictly designed to be delivered with speed so that the investors can capture the opportunity on a timely basis. This funding can be a game changer during a double closing situation, where an investor buys a property but sells it to an ultimate buyer on the same day.
How Does Transactional Funding Work?
Transactional funding is typically through private transactional lenders or hard-money lenders willing to facilitate quick transactions.
Generally, the process looks like this:
- Identification of the Seller and Buyer: The investor identifies a willing seller who will sell the property below the market price. Then, the investor identifies a buyer who is willing to buy that particular property above the market price.
- Fund Structure: The investor will structure the transactional funding for the purchase price and the closing cost.
- Close the First Transaction: The investor purchases the property from the seller, financed by the lender.
- Resale: The investor sells the property to the ultimate purchaser at a gain and pays the lender from the sale proceeds.
Who Uses Transactional Funding?
Real estate wholesalers often use transactional funding. Wholesalers find distressed homes, frequently from motivated sellers, and link them with investors who want to buy the houses and sell them for a profit. Wholesalers may favor double closings when assignment contracts—which transfer ownership straight from seller to buyer—cannot be executed. In this case, they can function as an intermediate and profit without using their own funds by purchasing the property and selling it right away with transactional funding.
Pros and Cons of Transactional Funding
Pros:
- Quick access to cash
- No personal funds required
- Minimal risk for lenders
Cons:
- Short repayment window
- High fees
Alternatives to Transactional Funding
Some deals just won’t fit the short-term nature of transactional funding, so here are a few alternatives:
- Hard Money Loans: Hard money loans are meant for renovation and, compared to transactional funding, have a longer payback period.
- Bridge Loans: Bridge loans help investors meet costs that fall between funding sources and usually last from one to three years.
- Home Equity Lines of Credit (HELOCs): For those who already own property, a HELOC offers flexible, quick-access capital at relatively low rates.
Is Transactional Funding Suitable for You?
Transactional funding is a goldmine for investors who, with a guaranteed buyer or seller, need cash and don’t want to use personal funds. By understanding the mechanics, pros, and limitations of transactional funding, you can decide whether this financing arrangement is in line with your investment strategy.
Do you need funding for a wholesale real estate deal in your area? At DoubleClose.com, we can help. With our 100% wholesalers transactional funding, you can close your next deal without any upfront fees.