A Real Estate Investor’s Guide to Transactional Funding

Key Takeaways


Getting a short-term loan quickly can be difficult for real estate investors and wholesalers, especially if there’s a great potential deal coming up soon. However, you don’t necessarily need to go with a sketchy loan or an offer with a high interest rate; you might be able to rely on transactional funding to finance real estate deals or other investment opportunities. But before you put all your eggs in the transactional funding basket, let’s take a closer look at what this process is and break down whether it’ll be a good choice for your investment goals.

What is Transactional Funding?

Also called same-day funding or flash funding, transactional funding is a unique financial strategy in which investors take out very short-term loans to make a purchase, then pay back those loans much more quickly than normal, oftentimes within the same day or week. They pay the loans back with profits made on the purchase they made with the cash. Through transactional funding, investors, especially real estate wholesalers, can buy and sell target properties quickly without having to risk their own capital. Because of their extremely short-term nature, transactional funding agreements are best used for real estate deals where a buyer will close on a deal and resell the same property (in a separate deal) for a profit within a few days at most.

How Does Transactional Funding Work?

There are several key agents in a transactional funding process:

  • A lender that provides the money for the transactional funding

  • An intermediate agent, like a real estate investor or real estate wholesaler

  • An initial seller, who sells the target property to the real estate investor

  • An end buyer, who buys the target property from the real estate investor once the investor gets the cash they need from the lender

In most cases, transactional funding is available from hard money or private money lenders. Additionally, transactional funding is usually only possible when the intermediate agent (such as the real estate wholesaler) has a well-documented and established end buyer in place for the second deal. That’s because the second or end buyer needs to be ready to buy a real estate wholesaler’s property immediately after the investor buys their target property from the initial seller. In other words, transactional funding really only works when all the players in such a transaction are ready to go and trustworthy.

You can use transactional funding for any real estate purchase and sale so long as the closing agent is willing to facilitate all the transactions and the lender agrees to the terms. In many cases, the lender will need important details made available to them to trust in the transaction. Note that transaction funding was available on a “pass-through” basis before the 2008 recession began. This allowed an investor to sign a contract to buy an excellent deal for real estate at a low price, then sign a secondary contract promising to sell the property at a higher price for a profit. Then the investor could use the end buyer’s money to fund the initial transaction to kick off the entire process. However, new regulations now require the purchase of the target property and the selling of the property to be two separate transactions.


[ Wondering how to fund your first investment deal? Click here to register for our FREE online real estate class where you can learn how to get started in real estate investing, even with limited funds. ]


best transactional funding

How Much Does Transactional Funding Cost?

It depends largely on the comfort levels of different lenders. Furthermore, different lenders may be more comfortable with certain deals than others. Even with this variability, real estate investors should assume that lenders will charge anywhere between 2% and 12% of the total loan amount. For example, if you need a $100,000 loan, you may need to pay between $2000 and $12,000 to facilitate the transactional funding process.

Pros of Transactional Funding

There’s minimal risk for a real estate investor or wholesaler, as the loans provide 100% of the loan amount to purchase a property. The paperwork for transactional funding situations is straightforward, and most transactional funding deals don’t require your credit score or income to be reported for approval. All you need is a proof of funds letter from the end buyer for your target real estate property. Funds can be acquired extremely quickly, sometimes in a matter of hours. Transactional funding allows you to take advantage of “flash in the pan” real estate deals that don’t come around very often. Most transactional lenders don’t require insurance, appraisals, or full title reports, which accelerates the process and may increase your profit margins.

Cons of Transactional Funding

The funds from a transactional funding deal come with closing costs. Fees will usually be taken out of your profits at both deals’ closes. Transactional funders usually offer short-term loans, so you have to be prepared to settle with your end buyer very quickly after taking out your loan. Transactional loans are often due within two weeks of being taken out or may even be due within 48 hours. Any end buyers must qualify for financing for the deal to go through.

Transactional Funding in Wholesaling

Transactional funding is often useful when trading wholesale properties. Through transactional funding, investors can get the cash they need to get a deal from a seller and quickly resell the property they purchased for a profit in a distinct, second transaction. This funding method gives investors more versatility and can replace the assigning contracts method of real estate trading, which is sometimes not permitted depending on your area. Because of its benefits and speed, transactional funding is of great use to real estate wholesalers.

Transactional Funding in House Flipping

Additionally, transactional funding can be beneficial for house flippers. Through this transactional method, house flippers can get the funds they need to rapidly purchase a wholesale deal, then flip the house and sell it to an end buyer without rehabbing it or spending lots of money fixing it up.

How to Qualify for Transactional Funding

While transactional funding can be effective, you’ll need to qualify for these deals in order to take advantage of them. Generally, you’ll need:

  • An end buyer contract that proves the end buyer’s funds are present to convince the transactional lenders that the deal can go through ASAP

  • Possibly a credit report and background checks for the borrower

  • Some due diligence for the property, like a desktop valuation or examining pictures from the interior and exterior of the property

  • Many lenders may also require a transactional funding letter, which evaluates the borrower based on the “5 Cs of Credit”

Alternatives to Transactional Funding

Given the risk inherent with transactional funding, some real estate investors may wish to consider alternatives, including:

  • Hard money loans, which offer short-term financing that is backed by an asset that may be repossessed by the lender later if necessary

  • Private money lenders, which are non-institutional lenders such as acquaintances, family, friends, or any other type of investor

  • Bank loans

  • Home Equity Lines of Credit

  • Joint-venture capital

Summary

All in all, transactional funding can be an excellent tool in your real estate investing repertoire, particularly if you stumble upon a great deal you want to jump on ASAP. But keep in mind that you will need a guarantee of an end buyer’s funds, plus their willingness to pay, to secure transactional funds from a suitable lender. Furthermore, you may be on the hook for paying back the loan faster than you anticipate, so make sure to close both transactions in a transactional funding deal quickly.


Is a lack of funds keeping you from investing in real estate? Don’t let it!

One of the obstacles many new investors face is finding funding for their real estate deals. Our new online real estate class, hosted by expert investor Than Merrill, is designed to help you get started learning about the many financing options available for investors, as well as today's most profitable real estate investing strategies.

Register for our FREE 1-Day Real Estate Webinar and get started learning how to invest in today's real estate market!

Real Estate Financing
Real Estate Financing
Real Estate Financing
Real Estate Financing
Real Estate Financing