Beginner's Guide to Transactional Funding in REI

It’s no secret that real estate can be one of the most lucrative investments, which is why nearly 77% of millionaire investors rely on it. But with average property sales prices at an all-time high, fewer people have the cash to get started.

With transactional funding, though, you don’t need to use your own cash. You just need a great deal, a motivated buyer, and a lender.

What Is Transactional Funding?

Simply put, transactional funding is a short-term loan that allows investors to close a deal without tying up their own money. (It’s also called flash funding, same-day funding, or ABC funding.) This type of loan generally covers 100% of a property’s purchase price and must be repaid within one to three days (sometimes as long as a week in special circumstances).

Real estate investors often use transactional loans to buy land, single-family or multifamily homes, or commercial buildings under market value. They will then assign them in a short amount of time for a profit—a process wholesalers can use. These loans can also fund quick house flips or rehabs.

Unlike traditional loans, transactional lenders don’t require investors to provide proof of employment, undergo a credit check, or pay a certain percentage down. What matters most is the strength of the deal itself.

Because of that, most lenders require signed contracts from both the initial seller and the end buyer. They may also ask for pictures of the property inside and out.

How Does Transactional Funding for Wholesalers Work?

Wholesaling can be a profitable way to gain experience in real estate—and transactional loans let you do so without using your own cash.

Here’s a simplified example: Let’s say you find a motivated seller who agrees to let you buy their house under market value for $150,000. You then find a buyer who’s willing to purchase the property from you for $175,000 and within a few days, you close with the seller.

Even though you’ll only own the home for a short period of time, you still need the cash up front to fund the initial purchase. The only problem is, you don’t have $150,000 on hand.

That’s where a transactional loan comes in. Once you find a hard money lender or private money lender who will fund the deal, you’re ready to move forward.

After both deals close, you repay the loan and pocket the difference. You likely won’t keep the full $25,000 because of closing costs and commissions, but you would still make a decent profit from the deal.

How Much Does a Transactional Loan Cost?

Transactional lenders typically charge a flat fee plus a percentage of the loan—anywhere from 1% to 12%, depending on the loan’s terms and length. So if you borrow $100,000 and your lender charges 2% plus a one-time fee of $500, the loan would cost you $2,500.

On top of that, you’ll pay closing costs for both deals, which lenders typically roll into the loan itself.

Pros and Cons of Transactional Funding

Transactional lending is a helpful addition to any savvy investor’s financial toolbelt. As always, though, it’s important to weigh the advantages and disadvantages.

Pros:

• Transactional loans are generally less expensive than hard money loans.
• You pay fees at closing.
• The underwriting process is faster than with traditional loans.
• You don’t need to meet certain traditional requirements, such as providing a down payment, proof of employment, collateral, or a minimum credit score.
• They cover the entire cost of the property.

Cons:

• The loan terms are very short—often only one to three days.
• They can be more expensive if you choose an extended loan term.
• It can sometimes be difficult to line up deals on the same day.

Want to Learn More About Becoming a Wholesaler?

If you’re new to wholesaling, it’s important to learn as much as you can about the process so you can do it successfully.

In PropStream Academy’s free course Introduction to Wholesaling, you’ll learn everything you need to know about wholesaling, including how to build lists, apply direct marketing strategies, and close your first deal. You’ll also learn how to use PropStream’s data tools to find off-market properties to buy under market value.

Try PropStream to close your next wholesaling deal with our 7-day free trial!