If you’re in the business of buying and selling commercial and/or residential real estate, then you’ve probably come across the concept of a transactional loan or hard money backed transactional funding. What is a transactional loan exactly? According to the experts at Quicken Loans, if your credit score isn’t quite as up to par as you’d wish it to be, you still have an excellent chance of qualifying for a transactional loan from a hard money lender. But that’s just one positive component of a transactional loan.
According to a recent article, transactional funding is not as common as other forms of financing, but it can be a beneficial addition “to your arsenal of loan options.” Having a keen understanding of what the different loan types are, along with the pros and cons of applying for them will, in the short and long-run, help you get an idea of what a decent fit might be for your overall investment strategy.
Some Facts about Transactional Funding
As a short-term, hard money loan that will allow an investor or wholesaler to acquire a building and/or property without using a single dime of their own finds, transactional funding can be approved by a lender so long as the borrower can prove that another buyer is committed to purchase said property in a short time-frame.
For some transactional lenders, an agreeable time-frame for a loan might only be a single day. However, many will give you upwards of a single business week. While transactional funding might on the surface sound like the kind of loan that can keep you up at night, in all reality, it is said to be quite profitable for all parties involved so long as everything goes right.
It should be noted that transactional loans, due to their processing speed, are sometimes known as flash funding, ABC funding, or same-day finding.
The Ins and Outs of Transaction Funding
Now for the nitty gritty of being approved for a same-day funding loan. Transactional funds are loaned by “private hard money lenders.” The funds can be utilized for any type of property/real estate.
The first thing you need are three business parties. These do not include the potential lender. In fact, this is where the ABC funding term originates since the original property owner/seller is “A,” while the investor is “B,” and the end purchaser is “C.” Simple as ABC—get it?
Here’s how the transactional funding loan works.
The investor scouts out a property that he or she believes can be turned around and sold at a profit within a period of just a few business days at most. The property owner agrees to a price/contract to sell to the investor. The investor then finds the end buyer who will close the deal with the property owner/seller.
In order to close on the transaction, the investor takes out a transactional loan to rapidly fund the deal without having to dig into his own pocketbook for the money. He then purchases the property from the owner. This is what’s referred to as an A-B transaction.
The investor then immediately sells the property to the new buyer, repays the transactional loan, and pockets the profit on the sale. This is what’s referred to as a B-C transaction.
In an ideal business world, both transactions will be funded fully, and will take place over the course of one to two days. But one final consideration to keep in mind are closing costs. This is where the investor must keep on top of precisely what the lender is going to require to make the transaction go smoothly.
But lots of lenders will gladly cover all the closing costs that go with the A-B sale. Fees are said to range anywhere from $1,500 to $5,000 depending on the size of the transaction. These lender costs and fees are automatically deducted from the investor’s profits during the closing.
A Typical Transactional Funding Situation
Some examples of properties that can be quickly “flipped” via a hard money backed transactional loan include single family houses, undeveloped property, commercial properties such as warehouses, empty office buildings, and strip malls.
One very recent example of transaction funding involves Bitcoin miners who were forced to move their operations out of China at the behest of the Communist government. Many chose to move to Texas to get their operations up and running as quickly as possible. After all, every day they weren’t operating, they were losing money.
In this situation, a miner could work with an investor who would seek out a commercial property. The investor locates an unoccupied building that might need a “quick face lift” and in turn, negotiates a price of $200,000 with the owner.
The investor then signs a contract with the end buyer (the relocated Bitcoin miner) to buy the property for $250,000. The investor works his or her magic and secures a transactional loan and at the same time coordinates the closing dates and times, plus any minor work that needs to be done on the property within a day or two.
The deal is done. All parties are satisfied. The miners are quickly back in business.