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Investing Strategies

Wholesaler Essentials: How Transactional Funding Works

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questionHey Moguls, Steph Davis coming to you with another highly informative lesson.

Today, I want to talk about a few things that are all kinda related. First, I'm going to explain what exactly transactional funding is, how it works and what it can help you accomplish. But, I'm also going to cover the differences between a double close and a simultaneous closing. I hear from some of you investors that you still get a bit confused about these two.

So, in this lesson, I want to clear it up for you, and explain how transactional funding plays a role in these scenarios.

Simultaneous Closing

For the most part, in your business, you’re probably used to dealing with private sellers – the regular Joe Shmoe homeowner. When you have those types of deals, you can just put the property under contract and assign that contract to your end buyer. In this case, there's only one closing.

It used to be that there could be what’s called a simultaneous closing. The funds from the end buyer could be used to pay the front-end seller, with the investor being paid a fee as the middle man. This type of closing has pretty much gone by the wayside.

However, to get around this problem, many title companies that do a lot of these types of deals, provide their own type of transactional funding at very affordable rates. From your network of other successful wholesalers, you can learn which title companies offer this service and their fee scale. That way, you can still do simultaneous closings – almost the same way you did in bygone days.

Contact the title company and ask, “How do you handle A to B and B to C transactions so that I don’t have to bring money to the table?” Then you shop the rates and find out where your best solution is.

For example, one local title company charges a fee of $300 for anything under $50K, and 2% for deals above $50K.

Even though the title company steps in with the funds, it’s still considered a simultaneous closing.

No Assignments with Banks

When you're dealing with bank-owned properties and short sales, most of them will write into their addendum that they will not allow you to assign your contract with them. You actually have to close on it with your own cash or with cash that you borrow. You close on that deal, then you turn around and resell it to your end buyer through a separate transaction. This is a double closing.

There's an A to B transaction with you buying it from the bank. You close on it. Then you resell it to your end buyer via a B to C closing – this is you selling it to your end buyer.

Now let’s say you don’t actually have the cash to purchase this property from the bank, so transactional funding comes into play. Enter the transactional lender...

Transactional Lender

What the transactional lender will do is lend you the entire purchase amount including closing costs. There's no income verification and there're no credit checks.

The only stipulation is that you have your end buyer in place. You must have your end buyer under contract with a deposit in hand. They need to be ready to purchase that property from you right after you buy it from the bank.

The transactional lenders will lend to you with no problem as long as you have that end buyer in place.

Earnest Money Deposit

moneyThey will not, however, loan you money for the earnest money deposit. You will have to come up with that on your own. If you don’t have the cash on hand to put up an earnest money deposit, you may have to pass on these types of deals.

One possibility is if you're able to locate an end buyer and get a deposit from them that's made out to you – money that is actually in your hand – and then give your own deposit to the bank.

Once you get a property under contract, once a bank accepts your offer, they're going to say, "We need the contracts back in 24 to 48 hours." With those contracts, you will need to have an earnest money deposit and certified funds in a cashier's check or money order.

If (and that’s a big if) you can line up an end buyer quickly – it may work. If you have buyers sitting there waiting for deals, you know what they're looking for and you can get them to commit to the property, sign the contract and give you a deposit really fast, then that’s one way to do it. (A lot of if’s in there…)

Nothing Is Ever Perfect

Such a scenario doesn't always work perfectly. More likely, your end buyer is not going to want to write out the escrow deposit to you personally. They much prefer to have it held in their own title company in an escrow account.

The hard fact is, you're going to have to come up with a deposit on your own. My advice to you then is: If you have no deposit money, you probably shouldn’t make offers on bank-owned properties.

You really need to have access to the funds whether it’s your own, or you're going to borrow it from someone (or maybe go 50-50 on a deal with someone) – you need to have access to an earnest money deposit. It's usually between $500 and $1,000; sometimes more. Sometimes they'll want 1% of the purchase price.

So… transactional lenders are not going to loan the earnest money deposit; you're going to need to come up with that on your own. Check out this helpful previous lesson I did on earnest money deposits. This will shed even more light on this subject.

There you have it – the behind-the-scenes info on exactly what transactional lenders are, the role they play and how they can make the difference of whether you snag a bank-owned deal or not.

Talk to Me

Hit me with any follow-up questions you might have in the comments section below.


Do It To It! Immediate Action Steps

1. Check out several different transactional lenders and compare fees

2. Calculate the fees of the transactional lender when you make your offer

3. Keep in mind the transactional loan will not include an earnest money deposit – you must come up with this cash on your own

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