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:
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.