Lex Levinrad explains transactional funding, including how and when it can work for you.
Transactional funding, or same-day funding, can be done when you are buying a property wholesale and selling it the same day. This allows for funding on a damaged house, without using your money, and provides quick profit.
Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Lex: Hey, everyone, Lex Levinrad over here with the Distressed Real Estate Institute. And I’m the host on today’s REI Classroom show. We’re going to be talking about transactional funding and specifically how you can use transactional funding for wholesaling.
Mike: This show was sponsored by passiverental.com.
Lex: First off the bat, a lot of new investors get confused between transactional funding and hard money. They are not the same thing. So let me clarify the difference between the two. Hard money is simply a short-term loan to fix and flip a property. So you’re borrowing money at a short period of time at a very high interest rate, and the reason you’re paying a high interest rate is because no one else will loan you the money because banks don’t loan money on damaged properties.
So ideally, you’re looking at a scenario where you’ve got a damaged property, it needs a ton of work, it might be fire damaged, hurricane damaged, water damaged. And you can’t get a loan from a conventional lender so you’re stuck with hard money lenders. They charge 13%, 14%, 15%, but they get you the money, and you can do the job and put the property up for sale and sell it. That’s hard money. We are not going to be talking about that. What we’re going to be talking about is called transactional funding.
Now, transactional funding has a lot of other names in the real estate industry. I’ve heard people call it fast cash, or flash cash, same-day funding, simultaneous closing, same-day cash. These are all really the same thing. What transactional funding is is actually very, very straightforward. Let’s say you make an offer on a bank owned property or a short sale, a HUD property, Fannie Mae, anything that’s an entity where you’re buying it for a discount, let’s say 60 cents on the dollar. So a house that would sell for $100,000, let’s say you’re buying it for $60,000 dollars because it is an REO and the bank wants to get rid of it quickly.
In that scenario, let’s assume you made an offer to the bank to buy the property and you offered $60,000 and the bank accepted your offer. But you’re sneaky and you want to flip that property and make a quick profit for yourself. So let’s say you put an ad in Craigslist, to sell it for $70,000. And let’s say you found a buyer who wanted to buy that house for $70,000. Now if you had the $60,000 dollars cash in your checking account, then you could buy the house, and then turn around and sell it to the other person for $70,000 and walk away with your $10,000 profit.
But the question is, what do you do if you don’t have the cash? What if you don’t have $60,000 dollars in your checking account? And that’s where transactional funding comes in. So with transactional funding, you can come to someone who has a transactional funding company like myself, and you can say, “Lex, I am buying this house for $60,000. I’m flipping it to this guy for $70,000. How much will you charge me for me to borrow $60,000 for one day from you?” And the answer is in our funding, we’re doing, depending on the deals, anywhere from 1% to 2.5% so it could be as little a $600 on a transaction like that.
And in order to protect ourselves, we just put a couple of things in place. Namely, we want to make sure that the second transaction, the $70,000 transaction is paid for. We want to make sure that the person who is buying it at $70,000 actually wired their money and we also want to make sure they signed their closing documents so that we know that it is a done deal. They’ve signed their documents, they’ve sent their money in, as far as they’re concerned, they have the house.
Once we see all those documents, we review them, we also review the lien search and the title commitment. And we go ahead and we fund. So that’s what transactional funding is, and there are a lot of companies out there that offer transactional funding. Just make sure you don’t confuse it with hard money.
So in short, to summarize once again, if you want to flip a bank owned property, a short sale, REO or HUD property, a Fannie Mae property, a Freddie Mac property, any property that you’re buying for cash at a discount, and you want to flip that property to someone else, don’t let your lack of cash be a stumbling block because there are people out there like me that for as little as 1% would be willing to find your transaction. So that’s how transactional funding works.
Now, the key thing to understand with transactional funding is it must be done on the same day. So in other words, you’re selling to that guy at $70,000 and you’re selling to him on August 1st, then make sure that your closing at $60,000 is also on August 1st. It has to happen on the same day in order for it to be transactional funding. So transactional funding is very useful for people that want to wholesale. So if you’re looking to wholesale properties, you’re essentially looking to find good deals and flip them to other investors.
A lot of times, these good deals are going to be cash-only deals. And if you don’t have the cash, you’re going to need to go out to a transactional funding company and borrow the money from them, even if it’s short-term, even for one day, you have them wire the $60,000 in. The end buyer wires the $70,000 in, and the title company simply cuts you a check for the difference, less your closing costs and your funding fee. So that’s today’s REI Classroom on transactional funding. It’s a very useful tool and make sure you put it in your arsenal.
Mike: passiverental.com is your source for turnkey done-for-you rental properties. If you’d like to be an investor and not a landlord, please visit passiverental.com to learn how to purchase cash flowing, professionally managed rental properties in the hottest rental markets across the country. We can also help connect you with financing for your next property. Invest the easy way today and get started by visiting passiverental.com.
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