Transactional funding, also known as same-day or flash funding, is a specialized financing tool for investors who need to quickly purchase and resell an asset. It involves obtaining a short-term loan designed for almost immediate repayment. Unlike traditional financing, transactional funding focuses on the speed of a transaction and the presence of a secured end buyer rather than the borrower’s creditworthiness.
This method is commonly used in real estate wholesaling. A wholesaler might use transactional funding to secure a discounted property from a motivated seller. Simultaneously, they’d have a lined-up buyer (often a rehabber or investor) ready to purchase the same property at a higher price. The profit made in this quick flip is used to repay the transactional funding loan.
Due to the rapid turnaround and significant potential for profit, transactional funding is appealing to investors experienced in identifying profitable opportunities and securing reliable end buyers.
How Does Transactional Funding Work?
Transactional funding revolves around a streamlined process with several key players:
The Lender: Provides short-term capital, often secured by the asset being purchased.
The Borrower/Investor: Typically a real estate wholesaler or investor who identifies and secures a profitable deal.
The Seller: The original owner seeking to quickly sell the asset.
The End Buyer: A lined-up buyer ready to purchase the asset from the investor at a higher price.
The Process:
The Borrower Finds a Deal: The investor pinpoints an undervalued asset and negotiates a purchase price with the seller. They simultaneously secure an end buyer willing to purchase the asset at a higher price.
Funding is Secured: The borrower approaches a transactional lender and provides proof of the purchase contract and the sale agreement with the end buyer.
Purchase and Resale: If approved, the lender funds the purchase. Transactions may use a “double closing,” where the property goes from the original seller to the investor and then immediately to the end buyer.
Repayment: The profit from the sale to the end buyer is used to rapidly repay the lender, often within days or weeks.
Benefits of Transactional Funding
Speed and Flexibility: Transactional funding allows investors to act quickly and decisively on opportunities that may require same-day closings. This speed provides a competitive edge in time-sensitive situations.
No Personal Capital Required: Lenders often finance 100% of the purchase price, meaning investors can secure deals without tying up significant personal funds.
Focus on the Deal, Not Creditworthiness: Transactional lenders prioritize the profitability of the transaction and the presence of a secured end buyer. This can be advantageous for investors with limited credit histories or those looking to avoid lengthy traditional loan processes.
Potential for Seller Benefits: Motivated sellers facing time constraints may find transactional funding appealing. It offers them a quick sale, often at a more competitive price than they’d receive through other channels.
Considerations of Transactional Funding
High Costs: Transactional funding comes with higher interest rates and fees than traditional financing options. Investors must carefully calculate costs to ensure profit margins remain viable.
Short Repayment Periods: Lenders expect repayment within days or weeks. This requires a well-defined exit strategy and the ability to secure an end buyer quickly to avoid costly penalties.
Risk: Transactional funding relies on the borrower’s ability to sell the asset at a profit within the agreed time frame. Any issues with the asset or difficulty finding an end buyer can lead to financial losses.
Finding Suitable Lenders: Not all lenders offer transactional funding. Investors often need to build relationships with specialized lenders who understand this type of financing and the associated risks.
Conclusion
Transactional funding is a niche financing tool that can be highly beneficial for experienced investors with a solid understanding of their market and a well-defined strategy. It offers speed, flexibility, and the potential for significant profit. However, it’s essential to weigh the higher costs and risks involved before deciding if transactional funding is the right fit for a particular deal.
