Is there a time limit when using transactional funding?
Transactional funding or transactional financing is defined by the length of time the investor needs money for the “transaction” to be completed. In some states the closing agents escrow both sides of the closing until all the documents and money are in place and then and only then will they complete the transfer of the deed to the property. If the closing requires court orders or city inspections, these closings can be delayed for days or even months.
The transactional funder should not have his money sitting in escrow all this time but rather wire in the money only on the day of the final closing. Transactional funding is often referred to as Flash Funding or One-day Funding because the actual time period of this private real estate financing should be only minutes or hours.
The transactional funding is used between the time the original property seller signs all the documents he is required to sign (HUD-1 Closing Statement, Deed, Bill of Sale (optional) and any additional documents required by the closing agent) and the time the end-buyer signs his required documents (HUD-1, Hold Harmless Agreement, or other documents as
required by the closing agent).
There are transactional funding lenders who advertise 30, 60 and even 90 day transactional funding. In actuality, these extended time periods are actually not transactional funding because the lender charges points and interest for the “extended” time period. Transactional funding only has points and ancillary fees attached to borrowing it.
A “point” is actually one percentage point of interest. For example, if the transactional funder lends $100,000 for the transaction and charges two points, he will receive, $100,000 x 2% = $2,000 as his cost for lending the money. This expense is a cost of doing business and is tax deductible as such to the investor and ordinary income to the transactional lender. Remember, without the transactional funding, the investor would not be able to do this deal and would have made no profit what-so-ever!