One of the most challenging steps in a real estate deal is finding funding.
Because without funding, you can do nothing but look at the perfect real estate investment property that you’ve found — and wonder what if.
There is one type of often overlooked type of funding that can provide finances quickly — sometimes the same day — and doesn't require a credit or income verification.
It’s called transactional funding.
In this article, we’ll explore the intricacies of transactional funding to help you determine if it’s the right type of financing for your next real estate investment deal.
What is Transactional Funding in Real Estate?
Let’s start by defining transactional funding.
With transactional funding, lenders provide 100% of the required financing. This can be done rapidly, even same-day.
The loan terms can range from 24 hours to 2-5 days to even two weeks.
Transactional funding is also referred to as:
- same-day funding
- Flash funding
- ABC funding
Transactional funding is most commonly used in a dual closing. If you’re a beginner real estate investor and aren’t sure what a dual closing is, it involves a homeowner selling property to a wholesaler. That wholesaler then immediately sells the same property to a buyer, known as the end buyer.
In this case, the double closing refers to both the wholesaler's closing and then the end buyer's closing.
Next, we’ll look at how transactional funding works.
How Does Transactional Funding Work?
After applying to a lender and showing proof of a purchase agreement — a requirement that we’ll discuss later on in this article — the lender has the option to approve or not.
If approved, the real estate investor is given funding quickly.
No credit check or downpayment is required — one of the advantages of this form of real estate funding.
Whereas a long term loan will charge interest, the lender profits off transactional funding by charging: a minimum fee plus a percentage of the loan.
What if the deal doesn't go through?
This is one of the risks of transactional funding.
Because a typical loan term ranges from 24 hours to 2 weeks, if the borrower hasn’t completed the back to back closing by the time stipulated in the contract, the loan converts to an interest rate loan that the real estate investor is then responsible for.
Transactional lending can be a great way for a real estate investor, such as a wholesaler, to make a profit from a deal without having to use their own funds.
Transactional Funding Eligibility
Keep in mind that approval of a transactional funding, otherwise known as flash funding, loan is asset-valuation based — not borrower income or credit based.
That’s why real estate investors with poor credit can still be approved for loans.
In most cases, you must only provide:
- corporate formation documents
- a purchase contract for the property
- an executed contract with an end-purchaser
Standard underwriting requirements like full title reports or appraisals are waived, which helps expedite the process.
Next, we’ll look at both the advantages and disadvantages of this type of real estate financing.
Advantages of Transactional Funding
Transactional funding has several advantages for real estate investors.
Open to More Investors
Because no credit checks or income verification is required, more investors can qualify for this type of loan — even those with poor credit history.
Transactional funding can provide same day funding, hence the name flash funding. This is a huge advantage, because in a competitive market, the investor who can close the quickest may have the upper hand over other real estate investors.
While many methods of real estate financing provide partial funding, a transactional funding loan will cover 100%..
Disadvantages of Transactional Funding
Here are a few disadvantages of transactional funding.
Must Have a Buyer
The only way to be approved for transactional funding is to have proof of an end buyer, such as with a purchase contract. Some lenders additionally require the end purchaser's prequalification to close the back to back transaction. Without that proof, the funds won’t be approved.
Delays are Costly
Because success hinges on an investor’s ability to quickly access capital, exit the transaction, and experience profits, transaction delays can be costly for real estate investors.
A buyer’s contract default, inability to obtain financing, or underwriting delays may derail the transactional funding.
Issues with Title
If you’re working with a title company that doesn’t understand the time element of transactional funding, such as with a dual closing, transactional delays can ensue.
To mitigate this, ensure that you confirm the title company’s experience with dual closings and only work with those who understand the process.
One of the big advantages of transactional funding is how quickly it works. But that can turn into a disadvantage for a beginner real estate investor who doesn’t understand the process.
Transactional Funding FAQs
Here are a few of the most commonly asked questions regarding transactional funding.
Q. Where Can You Get Transactional Funding?
Transactional funding is only available through specialized lenders; It is not available through a standard bank or hard money lender.
You should always work with a reputable lender who is licensed to lend in your state.
Q. Are there any upfront fees with Transactional Funding?
Upfront fees are not typical in transactional funding, but lenders will charge around 2% to 12% of the original loan amount.
Q. What is Proof of Funds?
Proof of funds is a letter issued by the transactional funding lender to the investor. It can be presented with their purchase offer, and it provides proof that the investor can access the funds to close the initial purchase.
Transactional Funding: The Bottom Line
If you are needing same day or next day funding, transactional funding is an option for financing your real estate deal.
But keep in mind it comes with both requirements — and risks.
Even if you aren’t planning on using transactional funding in the near future, it’s something to understand in case you find yourself in a situation, such as wholesaling, and it would make the most sense.
Understand transactional funding taking another step to grow your real estate investing education so that you can make wise investing decisions on future real estate deals.