[Updated November 2020]
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. Transactional funding is not as commonly known as some other forms of financing, but it is definitely a valuable addition to your arsenal of loan options.
Understanding what these loans are, how they work, and the pros and cons of using them will help you evaluate when they might be a good fit for your investment strategy.
What is Transactional Funding?
Transactional funding is a short-term, hard money loan that allows a wholesaler or investor to purchase a property without using any of their own funds. Lenders provide 100% of the required financing, as long as the borrower can prove that there is another end buyer in place to purchase the property within a short time frame.
Some transactional lenders allow for a loan period of only 24 hours, but most provide a timeframe of two to five days. Transactional funding is a great way to do a fast flip, and can be highly profitable if done correctly.
Transactional loans are also sometimes referred to as flash funding, same-day funding, or ABC funding.
For transactional funding in Houston, or across the State of Texas, see our Transactional Funding loan program page. →
How does transactional funding work?
Transactional funds are loaned by a private, hard money lender, and can be used on any type of real estate.
Transactional funding works when there are three parties involved (besides the lender). This is where the term ABC funding comes from: The original owner and seller is “A,” the investor is “B,” and the end buyer is “C.”
Transactional funding works like this:
- An investor (“B”) finds a property that they believe they can turn around to sell at a profit within a few days.
- The property seller (“A”) accepts a contract to sell to B.
- B finds an end buyer (“C”) for the property prior to closing with A. C then signs a contract with B to purchase the property on the same day that B purchases it from A.
- To close on this transaction, B obtains a transactional loan to quickly fund the deal, and B buys the property from A. This is the A-B transaction.
- B then sells the property to C—repaying the transactional loan and keeping the profit. This is the B-C transaction.
Both transactions will be fully funded and take place within a couple of days of each other.
A final consideration is closing costs, and it’s up to the investor to be aware of the details his/her lender requires. Many lenders will cover all closing costs associated with the A-B sale, and their fees can range from $1,500 to $5,000 per transaction. All of the lender’s costs and fees will be deducted from the investor’s profit at the closing table.
A transactional funding example
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 and mobile home parks
- Undeveloped land
For example, if an investor is working with a buyer who wants to move to Texas from out of state, the investor will look for properties. The investor finds a house in Texas that needs a quick face lift and negotiates a price of $200,000.
The investor signs a contract with the end buyer, to sell the property to the buyer for $250,000. The investor secures a transactional loan and coordinates closing dates, along with any minor work that can be done in one or two days.
After two closings, the investor’s profit starts at $50,000 — minus lender and any contractor fees. Fees from hard money lenders vary, but assuming a 15% for closing costs and another 2% loan fees, our investor walks away with over $40,000 and didn’t have to invest any of their own money.
Benefits of transactional funding
There are a lot of benefits for the investor who knows how to organize transactional funding:
- Low fees and costs, compared to some other hard money loans, means more profit. Additionally, transactional lenders typically don’t require full title reports, insurance, or appraisals, which cuts down on transactional costs as well.
- No personal qualifying makes this option available to more investors. Credit and income verification is not required. Borrowers don’t need to list assets or demonstrate their debt-to-income ratio.
- Fast financing is made possible because there is far less paperwork than most other loan options. The whole process can usually be completed within a week.
- 100% financing means the investor doesn’t have to put any of his or her personal resources on the line, and the margin negotiated (minus fees) is all profit.
Difficulties of transactional funding
There aren’t really “cons” or “disadvantages” to transactional loans. There are, however, some aspects of transactional funding designed to protect the other parties involved, which can be difficulties for investors.
- You need an end buyer lined up in order to get transactional funding, and you need to be able to prove it.
- You need to inform the end buyer’s lenders (if applicable) that they are funding the B-C contract of a flip, because of possible seasoning issues. (This means cash buyers are generally preferred.)
- You may only have 24 to 48 hours to complete both closings. Timing is critical and all issues must be resolved within that window.
How to qualify for a transactional loan
Qualifying for a transactional loan is much easier than qualifying for a traditional loan. It’s generally even easier than qualifying for other types of hard money loans. Credit checks, appraisals, proof of employment, etc., are not required.
What you do need:
- A signed and executed B-C contract, proving there is an end buyer waiting
- Lender Title Insurance Policy
If you’re investing in Texas real estate, Loan Ranger makes it extremely simple to qualify for a transactional loan. Our doc fee is only $595 and our loan fee is only 1-2 points.
Alternatives to transactional funding
If you can’t meet the tight time frame for a double closing, or if you’re interested in flipping real estate but don’t have an end buyer lined up, there are other short term, hard money, fix and flip financing opportunities available.
- Fix and Flip Loans for for Flipping Houses: 6 Funding Options and What You’ll Need to Get Financing →
- How to Find the Best Hard Money Lenders →
A Brief History of Transactional Funding
Transactional funding is 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 about 2008, real estate investors would flip properties by doing a simultaneous or double-blind closing. That means 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.
However, title insurance and financing industry regulations have tightened since those days. Now, real estate deals need to be fully funded and cash transferred before they can be re-sold.
As hard money lenders began to invest in a wider pool of smaller investors and flippers, transactional funding has also become more available. Now, transactional loans are no longer limited to large investors.
Transactional funding for Texas real estate
Transactional funding enables investors to conduct back-to-back closings legally, while protecting the privacy of the deal with the original seller. It can prevent either the seller or end buyer from attempting to cut out the investor.
If you’re investing in real estate in Austin, Houston, Dallas, or anywhere else in the State of Texas, Loan Ranger may be able to help with a transactional loan. We’d love to discuss your next deal and put together the best financing package for you.
Email firstname.lastname@example.org or give us a call at (512) 220-9916!