When time is of the essence and you need access to cash fast so you can get your deals done sooner, than later, transactional lenders are exactly what you need.
Especially when you’re looking to put together real estate deals without using any of your own money.
In this guide, we’re going to break down what transactional lending is and how it works, as well as a few examples of how you can use transactional lenders to get deals done fast.
We’ll also touch on when you can use it most effectively, the pros and cons of using it in your business, how to get access to transactional lenders, and a few alternatives that can also help you get access to cash fast.
What is Transactional Lending?
Same-day funding, “flash cash”, ABC Deals, transactional funding, 1-day flip loans, whatever you want to call them, they’re a highly-effective tool for getting access to quick cash to help you get deals done that may normally be just outside of your reach.
It involves taking out short-term loans that are repaid as quickly as possible — typically within the same day but sometimes up to a week, or more.
These loans are popular with wholesalers who need to stay legal when they’re doing double closings. It lets them find a buyer and a seller, purchase the home from the seller, and then resell it to their investor without using any of their own money.
How Transactional Lending Works
With transactional lending, you’re typically working with a private money or hard money lender when you have a well-established investor or end-buyer already in place.
The end buyer will be ready to purchase the property from you immediately after you purchase the property from the seller.
Then, you borrow from the lender to purchase the property from the seller while immediately flipping it over to your investor and using the proceeds of the sale to pay back the loan you received.
These loans can be used with just about any type of real estate, provided that your closing agent is able to take care of both sides of the transaction and your lender can verify the deals before distributing the money.
Here’s a quick rundown of how these deals function:
- Step 1: You find a seller who is motivated and agrees to a purchase price below market-value. This is the A to B portion of the transaction.
- Step 2: You then find an end buyer and get them to sign a purchase agreement to purchase the property at a higher value and close as quickly as possible. This is the B to C portion of the transaction.
- Step 3: You provide details of both sides of the deal to your lender to secure a transactional loan to purchase the property.
- Step 4: When you’ve completed both transactions, you repay the loan you received from what your investor paid for the property. You get to pocket the difference between the two.
Examples of Transactional Lending
While transactional funding is great for a few types of deals, it isn’t a one-size-fits-all strategy.
To help you understand when (and why) you should be using it, take a look at this example:
Let’s assume you’re a wholesaler and wanting to purchase a property from a highly-motivated seller for $200,000.
Your seller is “A” in the deal. You are “B” in the deal.
Then you have an investor who has expressed interest in the property and is willing to purchase it from you for $250,000.
Your investor is “C” in the deal.
You get both your investor and the seller to submit contracts stating their intentions with the property.
Then, you submit both of those contracts, from A and B, and from B and C to the title company.
You’ll notify your transactional lender that the deal is in motion and when you expect to close on it.
Your investor, “C”, wires a non-refundable earnest deposit to show that they’re serious and that you have a buyer already lined up.
When you’re ready to close, your investor, “C”, will put the remaining money ($245,000 in this example) into escrow before you’re able to move forward.
Once their money is in escrow, your lender wires $200,000 to your seller in order to purchase the property.
Then, your investor wires you $245,000 from their escrow that you’ll use to pay back the loan you’ve received in exchange for turning the property over to your investor.
After the funds have been received, you pay back your traditional lender, as well as any closing costs, loan origination fee, and whatever interest your lender charges you for taking out the loan.
The difference between the two contracts is yours to keep — as profit.
If your loan origination fee was $500, and your lender charged 2% interest on the loan, or $4,000, you’re paying back $204,500 of the $250,000 you received for the property — giving you $45,500 in profit.
This funding strategy is primarily used when you’re not able to use your investor’s money to purchase the property and you need access to cash fast.
In cases where you have to sign contracts on both sides of the deal, you’ll use transactional funding to help make the deal legal and keep funds separate.
It’s most typically used when you already have investors lined up, have motivated seller leads, are working with probates or REOs, short sales, or distressed properties.
Any time a deal requires you to officially close on the property before you’re able to flip it to another person, you’ll use transactional funding to help get the deal done.
Transactional Lenders and Wholesale Investing
For wholesalers, transactional lending helps open up more deals for you.
To get them done, though, you’re going to need to have all 3: motivated sellers with a negotiated sale price, proof that you represent a company (such as your s-corp or LLC), and an investor who has submitted proof of funds and is ready to finalize the deal.
If you’re not permitted to assign contracts in your area, transactional funding is a requirement.
Transactional Lenders and House Flipping
For house flipping, you need to move fast, which is where transactional funding and lenders can help.
You can get access to money that can be deployed quickly so you’re able to secure properties that would normally be lost to your competition. That lets you make offers fast and get the funds you need to rapidly close on the property so you can then sell it to another investor without having to do a ton of renovations.
Transactional Lending and Double Closing
For double closing on properties, you can connect buyers and sellers while pulling any remaining profit from the deal in areas where you may not be permitted to assign contracts.
Double closings happen when you have two real estate transactions occurring at the same time. In the case of wholesaling, that means one contract focuses on purchasing the home from your seller while the second contract focuses on selling that property to your investor.
You are still acting as the middleman and will handle both closings but it keeps you from using your end-buyer’s money to facilitate the deal — which is illegal in many areas.
The Pros and Cons of Transactional Lending
While transactional lending has plenty of upside potential, there are also a few downsides to using this type of funding to secure real estate deals.
Pros of Transactional Lenders
As far as reasons to use this lending strategy goes, there’s quite a few:
- 100% LTVs – A transactional loan can cover the entire purchase price of the home or property that you’re wanting to flip. Since you already know who your investor is and have gotten proof of funds + an intent to purchase contract from them, the finances have been established.
- No Credit Checks – With these loans, you don’t have to worry about your credit or credentials when you’re trying to get the deal done. Instead, you’re only verifying that your investor has the money available to purchase the property from you once your transactional lender has purchased the property from your seller.
- Speed – Many times, these transactions can be done within 24 hours from the moment you notify your lender that the funds are available with your investor and that both contracts have been signed. Compared to other lending options, it’s hard to match the speed you’re able to get deals done when you’re using transactional lenders.
- Cost – The interest rates for these loans are typically much lower than what you could find with a hard money or private money lender. For the most part, the rates range from 2% to upwards of 12%, depending on who you’re borrowing money from.
- Flexibility – These loans can be used for just about any type of property, ranging from single-family to multi-family, REOs, condos, commercial property, and even vacant land. Your lender is primarily only concerned with whether or not the loan will be repaid — not what type of deal it’s being used for.
- Control – When you’re doing deals using transactional lending, you’re able to keep your buyer and your seller separate to help reduce the chances they may attempt to cut you from the deal in an effort to either save more money (in the case of your investor) or make more money (in the case of your seller). These loans give you ultimate control over the process.
Cons of Transactional Lenders
With all the upsides of transactional lending, though, there are still a few downsides.
- Closing Costs – When you’re doing deals this way, you’re closing two different contracts — with two different sets of closing costs. When you factor in the loan origination fee and your interest rate on the loan, the closing costs can quickly add up (and eat into your profits.)
- Short-Term Loans – Transactional lenders typically only offer short-term loans so you’re going to need to be prepared with your investor and have your details lined up before you take the loan to avoid encountering unnecessary fees and interest.
- Payments Due Quickly – Some of these loans may be due within 48 hours after taking the loan out, making them incredibly aggressive. While some lenders may offer you up to 2 weeks to repay the loan, that tends to be the exception, not the norm.
- Deal Dependent On End-Buyers – Before you’ll be eligible for one of these loans, you’re going to have to verify that your investor not only has the funds available but that they’re ready to go as quickly as you are. These loans are highly dependent on your investor for getting financing and finalizing the deal.
- Delays Cost Big – The goal with these loans is to close as quickly as possible. If that doesn’t happen, you can roll into extended terms which usually means higher interest rates and fees. Sometimes, these delays are unavoidable, too, which adds an extra layer of risk to this funding strategy.
How To Access Transactional Lending
If you’ve weighed the pros against the cons and believe transactional funding is the right strategy to use in your deals, here’s what you’re going to need:
- End Buyer Contract – You’ll need to prove your buyer has access to funds before you will be eligible to receive funding, yourself.
- Background Checks – You may be required to go through a credit and background check.
- Due Diligence – You’ll need to provide pictures of the exterior and interior of the property as well as a valuation of the property.
To find these lenders, you can check out your local REIA meetings, use Google Search for “transactional funding + your city” or get referrals from your network.
The Alternatives To Transactional Lending
If transactional funding isn’t available to you, there are a few alternatives you can use:
Hard Money – Hard money loans are usually offered by private lenders that are backed by the property you’re trying to flip.
Private Money – Private money lenders are typically private investors with access to capital that are willing to help finance the deal for you in exchange for a fee.
HELOCs – A HELOC, or home equity line of credit, allows you to borrow against the equity in your own home to help finance the purchase.
JV Capital – Joint Venture capital is funding that’s brought together by two or more parties (typically other investors) to help you get the deal done.
It’s worth exploring all of the options you have available to ensure that transactional lending is the right funding strategy for the deals you’re trying to do.
When time is of the essence and you’re looking to wholesale properties in states where assigning the contracts isn’t legal, transactional funding is a great strategy to use.
As long as you know the deal is good, you’ve locked in the property at below market value and you have an investor that’s proven they have the cash ready to go, getting these loans is fairly straightforward.
Make sure you’re avoiding any potential delays, you have both contracts in place, the deal is solid, and you’re able to quickly repay the loan, and you can use transactional lending to get more deals done as a wholesaler or flipper.