Transactional Funding For Real Estate Investors, its benefits and the Containers
Transactional Funding for Real Estate Investors, and Its Benefits
Every real estate deal requires funding or financing. The importance of financing increases manifolds in the short sale arena. Let me ask you a question first – ‘What’s the quickest and the easiest way of wholesaling a property?’ The answer would be – by putting that piece of property under contract and then allocating that contract to an end buyer through an assignment agreement. Right? But you should remember that this is not a surefire success formula because contract assignments are not allowed in all cases.
In the real estate business, you’ll often come across with properties that are owned by banks or government agencies. For properties like these, most lenders don’t have provision for contract assignments. Which, in other words, means that you’ll require to commit to and buy the property yourself first. It’s only after you’ve closed on the property yourself that you can sell it to the end buyer.
But the big question is whether you’ve funds available to close on the property yourself because everyone isn’t cash rich. This is a common problem with many real estate wholesalers and fix and flip real estate investors.
That’s exactly where transactional funding comes into play!
What is Transactional Funding?
Transactional funding is a short-term loan which is lent to ease and expedite the process of a real estate investment deal. In this type of transaction, the investor or the wholesaler uses funds from a 3rd party for a brief period of time which is normally 2-5 days. It’s also termed as A-B, B-C type of transaction, where ‘A’ represents the seller, ‘B’ represents the investor and ‘C’ represents the end buyer.
In short: ‘A’ sells to ‘B’ and ‘B’ sells to ‘C’.
So, how does it work for the transactional lender? Well, they offer funds at the first closing and they get back their fees and the amount of loaned money at the second closing. Even though the period between the two closings is brief, the lender charges a substantial amount of money in fees. The wholesaler already has the lender’s fees in mind when they move on to enter into this kind of real estate deal. In the case of fix and flip investors, the period between the first and second closing may have a different time span.
Let’s understand it through a typical example:
JPMorgan Chase decides to short-sale a property for $150,000. As a wholesaler investor, you connect with a buyer who’ll buy the property for $190,000. Since the bank-owned property doesn’t allow contract assignment, you’ll need to purchase the property yourself first and then sell it to the buyer within a short span of time. So, your profit is the difference between the sales price and the price the end buyer agrees to pay. Here, the profit amount is $40,000. But it’s only a simplified calculation. You’ll need to consider the lender’s fees and closing costs among others to calculate how much you’ll actually make.
Benefits of Transactional Funding
It’s only because transactional funding brings so many benefits for real estate investors that it’s very much alive even today. When you’re planning to earn a huge amount of money over a short period of time, transactional funding is the way to go.
Key benefits of transactional funding include –
> Quick transaction turnaround
> Hassle-free paperwork
> Borrower’s credit score and income don’t matter
> Funding is usually the same as the purchase price
> Reduced or no risk
One key condition to get the most out of this funding technique is to have end buyers promptly available. Also, you should read the terms and conditions between the lines and consider the lender’s fees and interest carefully. Finally, do not forget to rent a container for storing whatever may be left in the house on which you are doing transactional funding.