Transactional Funding and When to Use It
Transactional funding in real estate is a very common and much accepted practice for wholesalers doing double closings. Many times, a wholesale will put a property under contract and find a buyer for it and make a profit. The issue is how large a profit is involved?
It’s not hard to find motivated sellers who will sell their properties below market value because of some pressing circumstance. This motivational problem is often related to a pending involuntary sale such as tax deed or foreclosure. These pending problems will have specific sale dates, so the property owner must act or lose his property.
There are other reasons for sellers to be motivated to sell and include but are not limited to: probate, two mortgages, transfer or simply the seller has no interest in the property, and it is a burden to keep.
These factors allow savvy investors to put a property under contract to purchase. Next they find another buyer (End-buyer) and sign another contract with him to purchase the property.
Most often the investor does not actually have the funds to purchase the property from the original seller. But he does have two common options to still make a profit on the transactions. First, the investor can sell or assign his Purchase Contract from the original seller to his End-buyer. The only potential problem with this method is that both the original Seller and the End-buyer will see how much the investor made on the transaction. This could result in either party to the transaction cancelling at the last minute.
The investor’s other option is to use Transactional Funding for the initial purchase of the property. The End-buyer will then buy the property, usually the same day, and his funds will repay the Transactional Funder. The investor borrows the Transactional Funds without regard to his credit or the value of the property. All that really matters is that the End-buyer has cash to close on the same day as the investor buys the property.
Assigning or selling the investor contract saves on closing costs that he would pay in a double closing. The risk is cancellation by the original Seller or the End-buyer and for that reason assignments result in very small profits. However, a double closing temporarily hides the investor’s profit from both the original Seller and the End-buyer.
The question often comes up, “How much is too much of a profit?” The answer is not simple because it involves the mindsets of the Seller and the End-buyer. Some sellers or buyers may consider anything over 3%, a Realtor® split commission as un-acceptable. It is certain that if the profit exceeds $10,000 to $20,000+ one or the other party will object or not close.
Because we supply Transactional Funding to investors nationwide, we often see investor profits in excess of $30,000 and up to $2,000,000. All these double closings are concluded with little or no money from the investors.
In summary, Transactional Funding can be used to complete real estate closings where the investor has little or no money. They can also be used to not disclose to a Seller or End-buyer how much of a profit the investor is making. Not all Transactional Funders are created equal so do your due diligence before you need one.