Introduction
In the dynamic landscape of real estate wholesaling, the ability to execute deals with speed and efficiency is crucial. While the conventional approach of single closing assignments has its advantages, there are scenarios where transactional funding becomes a vital asset. This article aims to provide an in-depth guide on the ins and outs of transactional funding, exploring its benefits, costs, and when it’s most effective.
What is Transactional Funding?
Transactional funding is a specialized form of short-term lending designed to facilitate real estate transactions until they are completed. Unlike traditional loans, these are unique for their flexibility, covering 100% of the purchase and closing fees and typically requiring no personal qualifications like credit scores. The duration of these loans can be as short as a few minutes or extend up to 90 days, offering unparalleled versatility for real estate wholesalers.
The Cost Factor
While transactional funding offers a high degree of flexibility, it does come with a price tag. Fees can range from a flat rate of $1,500 to $5,000 or be calculated as a percentage of the loan amount, usually falling between 1% and 4%. For example, if you need $87,356 for an initial transaction and your lender charges a 2% fee, you’ll end up paying $1,747.12—even if the loan is settled just minutes later.
When is Transactional Funding Necessary?
There are three specific situations where transactional funding becomes an essential tool:
1. Non-Assignable Contracts
Some contracts include a “no assignment clause,” which necessitates a double closing. These clauses are often found in bank-owned properties like short sales and REOs. In such cases, transactional funding becomes a necessity. Learn more about what a “no assignment clause” means in this legal guide.
2. Keeping Wholesale Fees Confidential
There may be instances where you don’t want to disclose your wholesale fee to either the seller or the buyer, especially if it’s a substantial amount. Utilizing a double closing funded through transactional funding can effectively conceal your wholesale fee, mitigating any potential issues with either party. Read more about the ethics of fee disclosure in real estate here.
3. Wholesaling to Retail Buyers (Whole Tailing)
When a property requires minimal repairs and can pass a mortgage inspection, it opens the door to wholesaling to retail buyers rather than cash investors. This strategy, known as “hole tailing,” may require 30 to 90 days to complete the sale. Transactional funding can serve as the financial bridge during this period. Here’s an article that explains the concept of “hole tailing” in real estate.
A Practical Example
Consider a home with an after-repair value of $300,000 that only needs cosmetic work. You could acquire the property for $200,000 and wholesale it to an investor for $210,000. Alternatively, you could use transactional funding to “hole tail” it to a homeowner for $250,000. Even after accounting for $6,000 in transactional funding fees, the profit margin is significantly higher.
Conclusion
Transactional funding is an invaluable resource for real estate wholesalers, offering the flexibility to navigate complex deals and maximize profits. While it does have an associated cost, the strategic benefits often justify the expense. At the end of the day, it’s not just about the money; it’s about the freedom and opportunities that come with being able to execute a wider range of deals.