Real estate investments can be of two broad types; property may be bought, developed, and retained for rental income or sold off piecemeal to individual end users or it may be bought with the express intention of quickly flipping it over for a profit. Transactional funding has all the attributes that can make things easier for investors looking to explore opportunities in the real estate market or those looking to ramp up their property investment business. It not only makes the funds available very quickly in comparison to traditional banks but also gives a chance to those with relatively poor credentials to avail of the loans. Transactional funding has been one of the sector’s better-kept secrets with most people outside the real estate industry not knowing about it and how to use it for obtaining the best advantage.
What Is Transaction Funding?
As the term suggests, huffingtonpost.com explains, transactional funding is a method of financing that is especially suited to short-term real estate investments. It is especially popular with investors who are in the market to spot lucrative opportunities for buying properties, fixing them, and flipping them in a matter of days. Sometimes, the entire property is bought at a big discount and sold off without being renovated to a new buyer who will take on the task of developing it. For people who do not know much about property flipping, it will be an eye-opener to learn that in 2017, as many as 207,088 properties were flipped according to the ATTOM Data Solutions’ House Flipping Report. With the increasing availability of foreclosure inventory and rising home prices, it is more than likely that flipping will only increase. However, since conventional lenders like banks have not made any significant changes to their lending policies, cash purchases of property have been steadily shrinking. In this content, transactional funding could very well be the best route for those looking to make an entry into real estate investments for those who desire to scale up their investment operations.
Real Estate Wholesaling Made Easier with Transactional Funding
The way transactional funding is normally structured, it is ideally suited for wholesalers dealing in real estate. Till 2008, this method of funding was a secret that was only known to knowledgeable investors with contacts to lenders with lots of capital. However, today you can find a number of transactional lenders or private lenders like libertylending.com who have formal establishments dedicated to investment in real estate. These lenders specialize in providing short-term financing for real estate investments, generally with a loan-to-value ratio of 50-70% to protect themselves from the risks involved, however, even 100% funding is sometimes available if the investor has a buyer for the property lined up and bound by a contract. According to experts, borrowers may have to pay in the region of $2,000 to $5,000 for using transactional funding. While this sounds very steep, it is still more reasonable than assigning real estate contracts that may not yield a profit of even $5,000. Because transactional funding involves two different legal closings, neither the purchase value of the property has to be revealed or the contracted sale price. The security of the details ensures that they don’t lose out to the competition offering better terms to the seller, allows them to make far superior profits, and also ensures that the number of unsuccessful deals is less.
How Transactional Funding Works
Though a lending operation, transactional lenders actually facilitate two separate transactions; not only do they lend the funds for the property acquisition but also hold the property until the sale is closed to an actual buyer. For example, if you spot a distressed property that is being foreclosed and negotiate a purchase for $450,000; and also negotiate a sale on a back-to-back basis for $600,000 with a client in the rehab business. By getting your transactional lender to finance the deal, you can make a neat profit of $150,000 while the actual purchase renovates the property and resells it for considerably more in due course of time. Typically, transactional lenders like the loan repayments to be for the very short-term, preferably a few days. While overnight loans are not unheard of in the sector, loans that are longer than 30 days carry with them higher fees and tougher compliance requirements.
Easy Qualifying for Transactional Loans
Even investors who have the right credentials and credit history increasingly prefer to access transactional funding because of the drawbacks of conventional banking; the underwriting process takes too long to accomplish, it can often be too undependable, the approval process is painfully inefficient and annoying to boot while rising interest rates have also increased its cost. In sharp contrast, transactional lenders can make available 100% of the finance required and even be willing to pay all the closing costs. The process can be accomplished in a few days instead of weeks and on top of that borrowers do not have to furnish an endless stream of documents and undergo credit verification, appraisals, asset, job, income verification, buy insurance or even have full title. With transactional lending being less risky, offering a more pleasant experience and definitely a more profitable opportunity, it makes it easier for borrowers to scale up their business to virtually limitless potential.
The Alternatives to Transactional Funding
In the real estate sector, the only viable alternatives to transactional funding besides cash and banks are hard money loans and private lending. Hard money lending has lost much of its luster with regulations kicking in that require them to conduct through credit checks, verify income and assets, insist on experience and a sizeable down payment. The rise in the fees and interest is applicable to hard money loans also have made it more uncompetitive. As a result, hard money loans are nowadays used more for meeting emergency funding or for acquiring properties that don’t have buyers lined up. The toughest competition for transactional funding is private money lenders; it is easy to find and get as well as arrange customized agreements.
Even as conventional banking continues to drag its feet with rigorous approval processes, the nimbler transactional lending in increasingly making its mark as a dependable, low-risk, and less-stressful method of financing wholesale deals and property flips.