In a perfect world, all real estate wholesale transactions would be completed by simply putting a property under contract, and then assigning that contract to an end buyer via an assignment agreement. While this is the quickest and easiest way to wholesale a piece of property, unfortunately, it is not always possible to accomplish.
When dealing with bank owned properties and short sales, for example, most lenders will not allow contract assignments, so instead of doing a simple assignment to your end buyer, you are required to close on the property yourself (in what is commonly referred to as the A-B transaction), and then sell to your end buyer in a separate transaction (commonly referred to as the B-C transaction).
This creates a problem for many wholesalers who do not have the funds available to close on the A-B sale themselves. While there are some title companies who will allow you to do a simultaneous closing and use your end buyer’s funds to finance both the A-B and the B-C transaction, the majority of them will require you to bring your own funds to closing. This is where transactional funding comes into play.
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What is Transactional Funding?
Transactional funding is a short term loan used to finance the A-B side of a short sale or REO wholesale transaction. When using transactional funding, there is no credit check or income verification required. The only stipulation is that you have to have an end buyer lined up to purchase the property from you immediately after you close the A-B sale. Transactional funding sources will not fund your deal unless the end buyer is in place and ready to purchase the property from you.
Most transactional lenders will cover all closing costs associated with the A-B sale, and their fees (which can range from $1500-$5000 per transaction) will be deducted from your profit, so you will not have to show up to closing with any of your own cash.
If you’re going to be using a transactional lender to fund your REO or short sale wholesale deals, just be sure to do your research before you start making offers. You’ll need to know what fees will be incurred when borrowing the money so you can be sure to take these costs into consideration when you are crunching your numbers.
Photo: Renjith Krishnan