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How Transactional Funding Works
The concept of how transactional funding works is possibly the single greatest advent for investors who have no money to do real estate deals.
How the process actually works is very often misunderstood by new investors.
Transactional funds are borrowed by an investor to purchase a property from a property owner so that he can resell to another buyer (“End-buyer”) very quickly.
These “simultaneous” purchase and resale transactions usually take place the same day and are often what are called “wholesale deals”.
The two separate closings are referred to as an A – B and B – C transaction or “double closing.” The first leg is the A – B closing and the second leg is the B – C closing.
The Letters designate the following entities –
“A” designates the original property owner and Seller
“B” designates the investor who is both the Buyer and then the Seller in these transactions
“C” designates the End-buyer in the transaction who is the “final” owner when the two closings are completed.
In some closing this A – B and B – C closings can have additional “legs” of the closings which can look like this –
A – B, B – C, C – D and even D – E…
This is called a “Daisy Chain” and it happens when the profit spread on the transaction is large enough that the investors in the transactions do not want the “A” Seller or the final End-buyer to know how much profit they are making on a specific deal.
“Too” large a profit may shock the “A” Seller and/or the End-buyer. Then the risk is either one or both the “A” Seller and final End-buyer decide not to close.
It is difficult to define what “too large” is to a Seller or a Buyer as people think differently.
We use a guideline that if your profit on the double closing is more than $10,000 to $15,000 you should double close instead of assigning your contract.
Assigning your Purchase Contract is the simplest and least expensive way of closing a wholesale deal as should be the first method to use if applicable.
By applicable I mean that you need to have two things fall into place –
- The seller or listing agent must agree to allow your contract to be assigned and,
- The end-buyer must allow the transaction because his money is being used to
fund the A – B side, which turns into a “A – C” transaction or a single closing.
The main issue with an “Assignment of Contract” is the “A” Seller and the “C” Buyer become fully aware of the profit the investor is making on the transaction.
WARNING – the “A” Seller and the “C” End-buyer often are very happy with the price they are selling at and the price they are buying at – UNTIL they see that you (investor) is making $________ for 15 minutes work coming to the closing table.
A simple guideline about how much is “too much” profit is that most buyers and sellers are not surprised to pay an amount equal to a Realtor’s Commission of 5% or 6% on the transaction.
This is not always the case and a few “Cheapos” think 5% or 6% is too much.
Five Percent (5%) of a $40,000 purchase is a very small profit and you’ll have to do hundreds of deals to make anything more than a substance living. Five Percent (5%) of $300,000 is $15,000 – which is what you should shoot for on all your wholesale properties.
All Transactional Funding Lenders are not equal and an investor should do his research before committing to any single funder.
Transactional funding sounds like simply funding the purchase price of the property and then the lender gets his money back when the property is sold.
That’s correct EXCEPT that the time between the purchase and sale are what differentiate transactional funding from transactional “same-day” funding, extended transactional funding (5+ days) and hard money loans.
Transactional Funding in the truest meaning of the term is when the purchase and sale of a property happen on the same day or two days apart.
Typically the time between the purchase and sale can be more than the same day because of recording issues on the A – B leg, funds from the end-buyer do not arrive timely or clerical issues that take time to resolve.
WARNING – only deal with end-buyers who use wired funds, never Money Orders or Cashiers Checks or your transactional funding lender will not do the transaction.
Extended Transactional Funding Nationwide typically means that the A – B and B – C legs are more than five (5) days apart.
The funding rates for these transactions becomes a function the lenders comfort with the equity in the transaction, the borrower, borrower’s credit and possibly, how much the borrower is putting into the transaction or so called “Skin in the Game”
Thirty (30) or Ninety (90) Day Extended Transactional Funding usually occurs because of a deed restriction imposed by the seller/lender which is an REO (bank-owned) or Short Sale property.
In fact, these extended transactional fundings are actually Hard Money Loans being disguised as “Transactional” to lure in unsuspecting investors.
Many of the Extended Transactional Funders also charge points and junk fees at closing.
Transactional Funders should have no upfront fees and 100% of the buyer/investor’s funds due on the A – B closing should be provided by the funder.
Proof of Funds for Transactional Funding should be supplied by the potential lenders well in advance of the actual transaction so the investor has credibility with the seller or the seller’s listing agent.
Ask your Transactional Funder for General Proof of Funds or ”POF” rather than one for a specific property.
This will allow you to use it over and over in your offers and not be tied to having to go back to the lenders time and time again.
As a transactional funds borrower, you should never have to pay a minimum amount for your borrowed funds.
In one case I recently saw, the minimum for any amount borrowed was $2,000.
On a $25,000 purchase, this would be equivalent to 8% or 8 points!
You should also expect to receive a Free POF or Letter of Credit (LOC) and a Verified Bank Statement from your potential lender.
Your cost to borrow the funds for actual transactional funding should not exceed one point (1%) of the amount needed to pay 100% of your purchase price as the “B” Buyer plus a wire fee (usually $50).
I put together an a “Best Transactional Funding Review” to help save you the time in contacting all the transactional funders that advertise on the internet.
You can find the Transactional Funding review of various transactional funders available nationwide on TransactionalFundingFL.com
We are pleased to announce that we have expanded our Transactional Funding into Georgia. Call us at 954-274-1003 for more information.
- 48 Hours Approval
- No Credit Checks
- Bankruptcy OK
- 100% Funding of Amount Due on the A – B HUD
- Read our client reviews at TransactionalFundingFL.com/clientreviews