Today we have an awesome lesson for all you Moguls out there about Transactional Funding.
You may be familiar with this funding method by one of its other more commonly used names (and there are bunch): 1 Day Flip Loan, ABC Deal, Flip Funding, Double Close Funding, Bridge Funding, Back-to-Back Funding, Simultaneous Funding and Gap Funding. Yowza!
Transactional funding is a short term loan for certain kinds of real estate deals. I mean super short. Super duper short, like for just a few hours or maybe a day or two. Yeah, that short.
You might be wondering why we’re focusing on this topic today. Because transactional funding, which I’ll refer to as TF from now on, is a pretty important tool that every REI dealmaker needs in their toolbox.
To put it simply: You need to understand how TF works.
You won’t always have to use it, but when you do need it, you’ll know how it works and you won’t be slowed down (or worse - possibly lose out on a terrific deal) when the time comes that a crazy good double close deal comes your way.
An A and B Conversation, C Your Way In
So the reason we love TF is because it allows you to close on two different properties quickly and on the same day without having to put any of your own money at risk.
Oh, and you make a quick profit too! This is blowin’ your mind, right? I bet you’re glad you kept reading.
I’m a visual kinda guy and I like to see actual numbers when talking about deals, so I’m gonna break it down using a real world example…
Let’s say you find a great foreclosure you want to buy. It’s easily worth 200K, but you scoop it up for just 100K. Awesome deal!
So, you’ve got the property under contract, but as a wholesaler, you’re not looking to fix and flip or rehab it, you want to sell it to an investor quickly for a quick profit.
A HUGE piece to the TF puzzle is making sure you have a solid buyer’s list. You need to have these investors ready before you find a great deal, so when the killer deal does come along, you’re all set.
I’ll say it again: You gotta have an end buyer lined up to purchase the property from you immediately after you close the first deal.
So you offer to sell the property to your investor for 110K. That means he’s making a killing because he’ll only spend about 10K fixing it up and will turn around and sell it for 200K, giving him a big pay day. Not too shabby.
This works because since you have the contract on the foreclosure, you can legitimately put a contract in place to sell it as long as you don’t close on selling it before you actually own it.
And just like that, you’re working 2 deals.
For clarity, let’s call the first closing in which you ‘buy’ the foreclosure ‘A to B’ and the second closing in which you sell the same property you just closed on to the investor ‘B to C.’ Party A is the bank that owns the foreclosure, Party B is you and Party C is the investor/end buyer.
Now You Know Your A, B, Cs
So now you’ve got to coordinate those two closings on the same day; A to B and then B to C. By law, you have to fund the A to B deal with separate funds before the B to C deal is closed.
Now you want to avoid bringing any money to the table. To make that work, the funds from your end buyer, Party C, can actually pay for your A to B transaction.
Here’s how…
You need a TF loan to buy the property from Party A. After that A to B deal is closed, Party C brings their money to close on the B to C transaction. With the money you earned from the second deal, you’ll be able to pay back the TF loan right away and the rest is money in your pocket.
Before we look at how much we made, there’s one more number we have to factor into this equation: The TF fee.
TF funders typically charge 2-3% of the amount borrowed. So on our hypothetical property, we took a 100K TF loan, so the TF funder is making a super quick 2K, plus probably a $500 funding fee.
The TF funder is happy because they got their money back in about a day or two and made a cool $2500.
The end buyer is happy because he got a smoking deal and will likely bring in 80K.
And you’re happy because you made a quick $7500. Hooray, everyone wins!
We Heart TFs
Now you see why TFs are so awesome, right?!
You do need some paperwork for a TF and we’ve put together this handy dandy list to make it a bit easier:
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Contract to Purchase the Property
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Estimated HUD-1 Statement for A to B transaction
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Short Sale Approval(s) (if applicable)
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Title Commitment
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Contract to Sell the Property
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Verification of Buyer C Funds or Conditional Loan Commitment
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Estimated HUD-1 for B to C Transaction
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Government-Issued ID for the Borrower
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Corporate Documents for Entity Taking Title (if applicable)
And don’t worry about the 90-day Seasoning Rule, it expired already. But you do need to know that TFs won’t fund Rehab Projects (Fix and Flips), Earnest Money, Escrow Deposits, Non-Real Estate Transactions or Transactions outside of the U.S.
Now back to the awesomeness…
With TFs, not only do you avoid the tedious traditional loan process, but there’s also no credit check or income verification required.
Bottom Line - Transactional Funding usually covers all the costs including closing, and the fees are taken from the sale price, which means nothing out of pocket for you.
I have no doubt you’ll enjoy this new spin on the A, B, Cs just as much as I do!
Understand Transactional Funding and Why It Rocks – TF is a super quick way to execute and close two contracts on two different properties on the same day – best of all, you won’t need to bring any of your own money to the table and you can make a quick buck.
Solidify Your Buyer’s List – You need to have an end buyer ready to invest when the perfect double close crosses your path. Make sure your buyer’s list is lengthy with qualified investors.
Know the ABCs of Transactional Funding – A to B is the foreclosure or short sale being sold to you in which the seller/bank is Party A and you are Party B – that’s the first deal. B to C is you selling your newly closed contract to the end buyer in which you again are Party B and the investor is Party C – that’s the second deal in your double close scenario. Now get ‘er done!