Transactional funding is a type of financing that is specifically designed for real estate investors. It is a short-term, hard money loan that makes it possible for investors to purchase an investment property without using any of his or her personal funds, as long as the investor has secured an end buyer who will purchase the property within a very short period of time (usually a period of two to five days). Because of the short term of this type of financing, transactional funding is also commonly referred to as flash funding or same-day funds.
Typically, investors use transactional funding to purchase short sales. Short sales usually feature contracts that cannot be assigned and are held by a bank. Because of this feature, the security interest of the bank that owns the property must be satisfied before the property can be sold to the prospective investor. Once the security interest of the bank that owns the property is satisfied, the prospective investor can then establish a secondary transaction or funding in order to purchase the short sale property. Usually, the two transactions are completed at the same time during what is referred to as a simultaneous or a double closing.
Transactional Funding: How It Works
The following is an overview of how transactional funding works and the elements that are involved in the process:
- First Contract. When a lender has a security interest in a property, the mortgage that the lender provides the homeowner with is usually secured by what is known as a purchase money security interest agreement; in other words, the purchaser of the property has agreed to provide the bank with a security interest in the form of real property, and that real property acts as collateral if the property owner fails to pay the money that is owed to the bank. Because of this agreement, the bank loan has to be paid first before the property owner can sell the property. This is known as the ‘first contract’ in transactional funding.
- Second Contract. The second contract is made between the individual who currently owns the property and the prospective investor. The current homeowner agrees to sell the property to the investor for an agreed upon amount of money; for example, the amount may be enough to pay the first contract, as well as the transaction fees.
- First Closing. During the first closing, interest that is owed to the bank is paid; liens and other secondary security interests may also need to be paid.
- Second Closing. When the security interest of the bank and any other financial obligations, such as liens, are paid, a second closing would occur. This closing involves the company that financed the transactional funding that was used to satisfy the first closing.
Benefits of Transactional Funding
Transactional funding offers specific benefits for real estate investors; for example, the credit score of the investor generally isn’t an issue, the funding is often 100 percent of the purchase price of the investment property, and the risk is relatively low, as the property is the only collateral.
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