If you’ve been involved in real estate beyond just buying and selling your primary home, you might have heard the term transactional funding or transactional loans being used by some investors. While not as commonly known as some other forms of financing, this type of loan is definitely one that you would want to have in your arsenal of options to consider. What are transactional loans you might ask? How does transactional funding work?
Well, that’s what we’re going to cover today. Diving deep into what these loans are, when they might be a fit for you to use as well as the pros and cons that you need to consider when exploring this financing option.
So let’s get started!
What are Transactional Loans or Transactional Funding?
Transactional loans are a relatively new addition to the financing options available to investors. It didn’t really surface until the real estate housing crisis around 2008.
Up until that time, this type of funding was generally only available to well connected real estate investors who knew private lenders and individuals with lots of cash to loan. Those were the investors who were doing fast flips and wholesale deals in large quantities. They could quickly flip properties and be in and out of the deal within a matter of days because of their easy access to quick funds.
It was a very lucrative form of real estate flipping if the deal was right and the terms of the financing were structured correctly.
This type of financing is a form of short-term, hard money lending. It allows a wholesaler or investor the ability to purchase a property without using any of their own funds as long as they can show that there is already an end buyer in place to purchase the property from the wholesaler within a short time frame. For most lenders and most transactions of this nature, the timeframe required is usually within 2 to 5 days. As you can see, it’s a great way to do a fast flip and can be highly profitable if done correctly.
However, now, not only can large investors get involved, smaller investors can as well with the increasing number of local lenders that are assisting their clients with transactional loans. Loan Ranger Capital is your local lender that offers this financing option as well.
How Do Transactional Loans Work?
Up until about 2008, real estate investors would flip properties by doing a simultaneous or double blind closing. That would mean that the original Seller would sell the property to a Buyer who would then sell it to another party. However, with increased scrutiny by title companies on all transactions since those days, especially due to the increased title insurance and financing industry regulations, real estate deals need to be fully funded and cash transferred before they can be re-sold.
A transaction loan can be a great option for wholesalers and investors to consider. Because of the fast turnaround time for these transactions as well as substantially less paperwork requirements, it is one of the most useful concepts in real estate financing and, if done properly, a great way to turn a profit. Understanding how to use this form of financing in your transactions can make a difference in your yearend profitability.
Typical examples of properties that are flipped using transactional funding can include:
- single family homes;
- multi-family apartment buildings;
- commercial properties such as strip malls, mobile home parks
- basically just about any form of real estate can use technique
This is how the process works when using transactional funding:
- Buyer “B” finds an investment property that they want to acquire.
- Seller “A” accepts a contract to purchase a property from Buyer “B”, the Investor.
- The Investor (Buyer “B”) finds a buyer for the property prior to closing. Buyer “B” then signs a contract with Buyer “C” to purchase the property on the same day that Buyer “B” purchases it from Seller “A.”
- To close on this transaction, Buyer “B” obtains transactional funding to fund the deal. Buyer “B” can then buy the property from Seller “A” and sell it to Buyer “C”. Both transactions will be fully funded and take place within a couple of days of each other.
What Types of Deals are Best for Transactional Funding?
Because of the nature of these types of deals, there are very specific types of transactions that would work best with this type of funding.
This type of funding enables investors to conduct back to back closings legally, while protecting the privacy of the deal with the original seller. It also can prevent either the seller or end buyer from being tempted to try to cut out the investor.
Using this means of financing, it’s also possible that you can make a lot more on these deals than with assignments of a contract. Many end buyers, including investors are going to have an issue with you trying to make a large 5 figure or even 6 figures on an assignment. They might be okay with a little bit of a fee, but if you can make more…..why not?
One of the benefits of this type of loan is that there are generally lower fees and costs associated with them compared to some hard money loans. And because of the nature of the transactions, there is no credit or income verification and far less paperwork that has to be completed as well.
Transactional lenders typically aren’t going to require full title reports, insurance or appraisals either. That cuts down on transactional costs, leaving more profit, and with a lender’s fast close on this type of financing, the whole process can usually be completed within a week or so.
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Best of all, transactional funding usually provides 100% financing of the deal, and virtually no personal qualifying. You don’t need to have your credit checked, prove your job or income, show what assets you have or worry about what your debt-to-income ratio looks like. That not only means a lot less headaches, but it is also less likely that the deal will apart in the middle.
However, like most things, there is a catch! You need to have an end buyer already lined up in order to get this form of financing. You have to prove you have a cash buyer or a buyer who qualifies for financing in play at the time of application. Just a note – make sure that your end buyer and their mortgage broker are aware that this is a flip.
When it comes to closing costs, you need to make sure to know all the details of what your lender will require. Many lenders will cover all closing costs associated with the A-B sale, and their fees can range from $1500-$5000 per transaction. All of their costs and fees will be deducted from your profit at the closing table.
Transactional Loan Pros and Cons
Pros of Transactional Funding Options:
- Credit score and income of the borrower are not a factor in determining loan approval
- Funding is usually available to 100% of purchase price;
- Transactional funding lender will provide proof of funds;
- Limited exposure since you are only using property being flipped as collateral;
- Easy and minimal paperwork to complete the transaction;
- Less costly financing option due to lower fees and expenses. All costs are taken at the time of closing.
Cons of Transactional Funding Options:
- Many transactional funding options only offer 24 to 48 hours to complete both the closings;
- Timing is critical and all issues must be resolved within the timing window;
- All of the end buyer lenders must be aware of the flip, because of possible seasoning issues. This makes it a better option to consider with cash buyers.
What Do You Need to Apply for Transactional Funding -Not That Much!
We try to make it as easy and as smooth as possible for every client we work with, and our transaction loans are no different. Transaction loans have minimal paperwork and other documentation providing your transaction meets the requirements.
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Let’s start with what we don’t require!
- There’s no Credit Checks Required
- No qualifying in terms of credit scores
What we do need:
- Lender Title Insurance Policy is required
- Doc fee of $595
- Loan fee of 1-2 points
- Up to 100% of costs
If you haven’t explored transaction loans prior to now, hopefully this blog post has given you enough of the basic information to consider it the next time you encounter a deal that might fit. This form of loan can be very effective and enhance your bottom line if setup correctly and used on the right project. 4
And if we can help you with a transactional loan or other financing option, please let us know. We’d love to discuss your next deal with you and put together the best financing package that you need to make it a success. Just give us a call at (512) 220-9916!