The real estate market can move very fast, and opportunities may slip away without timely access to funding. However, getting cash quickly, especially from legitimate sources with reasonable rates, is often quite difficult. That’s where transactional funding in real estate comes in.
What Is Transactional Funding?
Transactional funding, also known as flash funding, is a short-term loan used for transaction purposes in real estate investment. It is often repaid within a day or a week and allows investors to have the capital to close transactions rapidly.
Transactional funding is convenient for double closings in cases where an investor buys a property and immediately resells it. For example, when an investor has a committed end buyer ready to purchase, transactional funding can be used to cover the initial purchase without using one’s own money. (Also read: basics of transactional funding.)
How Does Transactional Funding Work?
Here’s a quick breakdown of the process:
1. Locate a Property: The investor looks at a property below market value that the seller wants to close quickly.
2. Secure a Buyer: The investor lines up a buyer willing to purchase the property at a higher price.
3. Transactional Funding: The investor borrows the purchasing money to acquire the property.
4. Sell the Property: The investor sells the property to the seller and pays back the loan.
If done properly, this process can produce a good return on investment, even after deducting loan fees and closing costs.
Who Uses Transactional Funding?
Wholesalers are intermediates between sellers and buyers and prefer transactional loans. They normally use the double closing strategy to acquire profits secretly. The wholesalers find distressed properties from motivated sellers who want a quick sale. They locate end buyers (often flippers) willing to pay more for the property. Using transactional funding, wholesalers avoid using their own money while ensuring the deal closes smoothly.
When Is Transactional Funding Ideal?
Transactional funding isn’t suited for long-term projects like flipping homes with major renovations. Instead, it works best when:
- The repayment period is short (typically 2 to 5 days).
- The property requires minimal updates, like cleaning or cosmetic repairs.
- The buyer has proof of funds and is committed to the deal.
Key Advantages of Transactional Funding
One major advantage is being able to finance 100% of a property. The short payback period reduces the lender’s risk, making full financing more possible compared to many other loans.
For investors, this means:
- There is no need to tie up personal funds.
- Investors have can close deals quickly.
- There is less risk compared to long-term loans, where market or construction delays could cause problems.
Is Transactional Funding Legal?
Yes, transactional funding is legal if all parties involved (seller, buyer, and transactional lenders) are fully aware of the deal. However, transparency is key; large profits visible through the transaction may jeopardize the deal, especially if one of the parties feels uncomfortable.
Final Thoughts
Transactional funding can be a powerful technique for real estate investors who need quick, short-term cash to close deals. The process requires careful planning, a committed buyer, and making sure all the details are taken care of.
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