What is Transactional Funding?
You’re probably here because maybe you’ve heard of transactional funding and looking to get more information on it and how it works. Well, you’re in a good spot because that’s what we provide for our students on a regular basis. So let’s dig into the nuts and bolts of transactional funding and I’ll show you how it works and how to get yourself some.
It all started several years ago as investors were buying up properties left and right. I mean things were clipping right along and investors were making fortunes in real estate. They would find great deals from the banks and then find investors or end buyers to buy the deal from them. They were basically the “middle man”. One of the strategies that many investors would use to their advantage was using the investors or end buyers money to fund the transaction between them and the bank. In doing so meant that they wouldn’t have to qualify for a loan or get any type of financing because they didn’t need to. They were using the money from the end buyer to fund their purchase from the bank.
You can see why investors loved this strategy because it meant they got to keep more profits since they weren’t borrowing money and it was risk free to them since they never spent any money or took out any money. Most referred to it as a simultaneous closing. Well as with most good things, they eventually come to an end. There were some investors that really took advantage of this strategy and were doing some shady, illegal transactions that forced the title companies to re-evaluate this strategy so many investors were using. Once title companies caught on, they eliminated the idea of using your end buyers money to pay for the initial transaction between the middle man and the bank.
Investors again had to be creative and come up with a solution to provide a way for them to close deals without the use of credit and a huge borrowing expense. This is when Transactional Funding really started to take off because the fees to borrow the money were extremely low and it wasn’t based on credit scores or income verifications. This was huge because investor could basically do the same thing as before, but just pay a little bit out of their profits to the funding partner. The reason why costs were so low was because the money was literally tied up for a few hours and it satisfied the requirement for the bank of using your own money to fund the initial transaction with them.
So this is how transactional funding works today. There are 2 separate transactions that take place. There is a transaction with the bank and the middle man, we’ll call this A and B, A being the bank and B being the middle man. Then there is another transaction with the middle man and the investor/rehabber/end buyer. We’ll call this B and C, C being the investor/rehabber/end buyer. So when the first A – B transactions takes place, banks require they use their own money to fund this transaction. They can’t use money from the B – C transaction to fund the A – B transaction. So the B middle man investor contacts a transactional funding partner, like us, and sends us the paperwork we need in order to give him funding.
The main requirements are that a purchase contract be signed by the end buyer and they have financing in place to close on this deal. Once the funding partner has everything they need, the middle man uses the funding partners money in his behalf to fund the deal. Now the middle man is on title which is what the bank wants. Now, at the same time, or close to it, the middle man and the end buyer are also closing with the title company. Money from that transaction between middle man and end buyer will go to pay off the transactional funding partner and everyone is happy. Transactional funding partner walks away with a few points for having his money tied up for a few minutes, middle man is happy to make some money because without funding, he wouldn’t be able to do deals, and end buyer is happy they found a great investment property. So everyone wins.
Who to use for Transactional Funding?
If you google transactional funding you will find a lot of companies that offer this service for investors. Be careful though because not all are alike. There are a lot of little hidden fees that add up and just make sure you know everything before you pull the trigger.
We are a little bit unique when it comes to transactional funding because we literally fund our students deals. It’s our money. We are not borrowing the money from someone like most everyone else is. And because we don’t have to borrow money from someone else, we don’t have to pass on all the little fees that everyone else does. There are no admin fees, no doc fees, no processing fees, no just because you use us fees. All we charge is 2 points on same day deals, whatever the amount is. So if you use $100,000 to fund one of your deals, it will cost you $2000… that’s it. There is no minimum requirement either, however, we do have a maximum. That maximum is $600,000. Anything over that and you’ll need to get the money somewhere else.
We typically have a 24 – 48 hour turn around time so we can get the money to you quickly. You can use your own attorney, title company or escrow agent or you can use one of ours. Now, obviously we do this a lot. We also understand not every deal is going to close SAME DAY. Things happen. Banks have restrictions. Not to worry. We’ve got you covered. We can lend past the one day, however, there are NO fees for same or next day transactions. After that, there will be a fee and that fee will increase the longer our money is tied up. But don’t worry, we’ll work with you on this to make sure everything goes through smoothly and there will be no surprises. We want you to come back and use our money and more, as we build this relationship together.
To learn how you can get immediate funding, visit www.FourPillarsofRealEstate.com.