What is Transactional Funding?

transactional_funding

If you are into or looking to get into wholesaling you will want to know about transactional funding.  A bunch of third party companies have set themselves up to help investors get this process done.

Transaction funding is made for investors who would like to wholesale properties (for the most part to cash buyers).  The entire reason that transactional funders exist is because with REOs and short-sales is the bank does not let you assign your escrow to another buyer.  So this means you have to close your transaction and the buyer has to close their transaction with two separate sets of funds.

So most transactional lenders come in with the money for a 24 hr period to help you close your transaction and one day later the buyer comes in with their own funds to close their transaction.  In the industry, your purchase is known as A to B.  The seller is A and you are B.  All states it varies, but in California the A to B transaction needs to happen for a complete day and the B to C can happen 24 hrs later.

Here is an example transaction:

  • You put an REO under contract for $100,000 it needs a lot of work, but you would like to wholesale the deal
  • On the original contract it is put in your name AKA Build Bankroll Inc.
  • Build Bankroll Inc provides an earnest money deposit for $10,000
  • You market the property and find a cash buyer for $125,000
  • You draw up a contract and open a second escrow with you as the seller (AKA Build Bankroll Inc) and your new buyer (AKA Rehab King)
    Note: most transactional funders require that you use the same escrow company
  • For your purchase escrow you order a Title Insurance Binder, so you only pay for a limited amount of Title Insurance.
  • You make contact with a Transactional Lender and they wire $90,000 + fees to your first escrow (you already have a 10,000 EMD)
  • Your buyer (Rehab King) funds the second escrow with 125,000 + fees.
  • Escrow A to B (Bank to Build Bankroll Inc) closes
  • 24 hours later escrow B to C (Build Bankroll Inc to Rehab King closes)
  • The escrow company disburses 90,000 + fees + transactional funding cost to the transactional lender and wires you the left over amount

The parties involved:

A: The Bank Selling the Property
B: Build Bankroll Inc (the person that has the REO under contract)
C: Rehab King (your wholesale buyer)

I really have made things much more confusing then they are but that is the detailed steps.

In my opinion if you have any connections who have decent cash reserves they are a much better source of funding.  Typical fees for a transactional lender are 2-3% of the funded amount plus $500 in fees.  The fees usually work on a sliding scale and have a minimum.  So in this deal you’d expect to pay 2% of 90,000 = $1,800 + $500 = $2,300 to borrow 90,000 for two days!  I’d much rather give that to someone I know then a 3rd party.  But it all depends on peoples comfort level with your operation.

Your profit is really effected by this:

100,000 purchase price
125,000 sales price
25,000 Gross Margin
-2,300 in transaction fees
-500 in purchase escrow fees
-600 in sales escrow fees (including a bit of title insurance)
-3,400 to make the deal happen

That is why you need quite a big margin if you are planning to wholesale a property.

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One Response to “ What is Transactional Funding? ”

  1. Al says:

    Do you know if transactional funding works in CA? I ask because I once called a company before and described what I was trying to do and I was told that it was illegal to do that. Have you used TF when wholesaling here in CA?

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