Tuesday, June 16, 2015

Transactional Funding

What is transactional funding? and when would it ever be used?

Transactional funding is hard money typically used by a real estate investor for same-day closings, also known as flash cash, back to back funding, or bridge loans.

There was a time when investors used to do simultaneous closings, but those are no longer allowed.

The benefit of doing a "simultaneous" or "same day" closing is that the end-buyer is unaware of the price the investor paid to purchase the property.

This type of closing was typically used when a wholesale investor got an off-market property under contract for a low price from a Seller. The wholesaler would then add in his assignment fee, and offer the property for sale to a rehabber or end-buyer for a larger price that included his assignment fee or profit.

If the profit was large, the wholesaler might not want to disclose to either the Seller or the end-Buyer their contractual purchase price. A simultaneous closing (in the good ol' days) would allow the investor to close on the property without using any of their own funds, as they would close that same day using the funds that the end-Buyer had wired into escrow.

When simultaneous closings are not allowed, transactional funding fulfills the same purpose: it allows a real estate investor to close on a property and re-sell it within 24 hours to another buyer at a much higher price. Transactional funding may be used to cover the investor's out-of-pocket cash closing costs.

An investor might also use transactional funding, if the end Buyer is using conventional financing, and must be listed on the purchase and sale agreement.

Transactional funding is hard money, and it is typically lent by professional money lenders. Here is a good link to a transactional funder used by Robyn Thompson students that explains the process fairly well.

So while a transactional funder may provide free Proof of Funds letters, they will typically charge points, fees or a high interest rate on a transactional loan. Be sure to ask about details, and how interest charges are computed.

Happy Investing!

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