Mastering Commercial Transactional Funding for Real Estate

You’re a real estate wholesaler or real estate investor, and you’ve found a great commercial property. Maybe it is a great multi-family building or a strip mall, but you need to move fast. This is where a tool like commercial transactional funding comes into play, giving you the ability to swiftly secure properties.

Ever wondered how some investors manage to flip properties so quickly? The answer might lie in a lesser-known financing method called transactional funding. This approach can help you close deals rapidly, and we’ll explore all of the aspects of this tool.

Table of Contents:

• What is Commercial Transactional Funding?
• How Commercial Transactional Funding Works
  • Key Players in a Transactional Funding Deal
  • When Do Investors Use Transactional Funding?
  • The Cost of Transactional Funding
  • How Transactional Funding Benefits Investors
  • The Importance of a Ready End Buyer
  • Steps in the Commercial Transactional Funding Process
  • Alternative to Traditional Loans
• Commercial Real Estate Versus Residential Transactional Funding
  • Challenges and Potential Solutions With Funding
• FAQs about commercial transactional funding
  • What is transactional funding for commercial real estate?
  • What are the three main types of funding?
  • What is an example of a funding transaction?
  • What are the requirements for transactional funding?
• Conclusion

What is Commercial Transactional Funding?

Transactional funding is a short-term loan. It is often paid back within a day or a few days and real estate investors use this frequently. Specifically, commercial transactional funding is made for commercial property types.

Think of a strip mall or an apartment complex being bought and sold quickly. These properties often come with a higher price tag, so having access to quick capital is even more critical in these scenarios. Sometimes this kind of method is referred to as simultaneous closings.

How Commercial Transactional Funding Works

This type of funding lets investors buy a property without using their own money. As an investor, you would find a property, get a transactional loan to buy it, and then quickly resell it to a final buyer. It is common to find great properties for these types of deals in foreclosures, short sales, and REOs.

The main benefit of transactional funding is speed. But, the deal has to be rock solid with an end-buyer already waiting in the wings, because without that, the funding won’t work.

Key Players in a Transactional Funding Deal

Typically there are 3 key parties involved with this method of funding. Understanding their roles will show you how the process is dependent on timing. There will generally be a “Seller A”, “Wholesaler or Investor B”, and a “Buyer C”.

The initial seller, or “Seller A”, is often motivated to unload the property quickly. They might be facing foreclosure or just need the cash fast. Then, there is “you” in the middle that snags the property with transactional funding and resells it, while the end buyer might be another investor looking to expand their portfolio or plans to improve the property.

When Do Investors Use Transactional Funding?

Real estate wholesalers and investors tend to use this short-term lending to their benefit when speed is most critical. Transactional funding becomes particularly handy with multi-million dollar deals on the line. The funding can help complete a double closing scenario.

Back in 2021, there were a large amount of home flips going on. According to data provider Attom, 94,766 single-family houses and condos in the United States were flipped in just the third quarter. More recently, 30-year fixed rate mortgage rates hit 7.05 percent at the start of October.

Things change so rapidly, it shows the markets change drastically. Because of that, sometimes investors want to secure a property without waiting. A transactional funding lender can provide financing to estate investors for these estate deals.

The Cost of Transactional Funding

Typically, transactional lenders might charge an origination fee, which could be a couple of percentage points of the total loan amount. So, for larger commercial deals, these costs can add up. Despite those fees, the potential profit often makes it worthwhile for the investor.

How Transactional Funding Benefits Investors

Imagine finding a retail space being sold below market value because the owner needs to liquidate quickly. Using transaction funding, you secure the property immediately and then sell it to an eager buyer at a profit. Without this type of funding, such a transaction could get tricky because of how quickly the markets change.

This immediate financing could also show you can swiftly close the deal, too. But this might not always be the best fit. Funding lenders will want to analyze details and make sure everything adds up first, just in case.

The Importance of a Ready End Buyer

The key to successful transactional funding is having a committed end buyer. Transactional funding lenders are more likely to provide financing if you show the deal will go through. If you don’t have an end-buyer in place, the whole deal could possibly stall.

Steps in the Commercial Transactional Funding Process

There is more than one method of investing. To make the most of a potentially lucrative real estate transaction, understanding this process is critical. To simplify it, it makes sense to visualize the full flow, step by step:

1. Find an undervalued commercial property: This could be anything from an office building to a shopping center that’s being sold for a lot less.
2. Find a buyer who is ready to close: This helps establish there is funding to close the transaction.
3. Secure the loan: Once you have a buyer and a seller, you would apply for commercial transactional funding to cover the purchase price.
4. Conduct due diligence if applicable: Some lenders may do basic due diligence including; a desktop valuation and taking pictures of the interior and exterior.
5. Close both transactions: You buy the property from the seller and sell it immediately to the final buyer, paying back the transactional funding loan at that time.
6. Repay loan immediately After the A to B close, the deal closes with Investor/Wholesaler B and Buyer C and transactional loan is repaid at close of B to C transaction.

Alternative to Traditional Loans

Traditional real estate funding methods can sometimes be slow, even after you jump through a lot of different hoops. Commercial transactional funding differs because of its focus on immediate funding. The money lender generally won’t even need you to fill out a full on mortgage application.

Since funding lenders work primarily on the ready end buyer’s commitment, they usually avoid requiring extra documentation. So while new mortgage applications fell by 14.2 percent in a recent September week, those that need faster methods won’t see this as a problem. A hard money loan wouldn’t be as fast, either.

Commercial Real Estate Versus Residential Transactional Funding

Both have their intricacies. Think about what the differences might be when you think about buying a condo building versus a whole office space. There are similarities, but a whole different scope.

Challenges and Potential Solutions With Funding

A transactional funding lender wants to see that both the seller and the end buyer are fully committed. It might seem strange that transactional funding can help smaller entities compete. By making it easier to access working capital, small businesses can make those bigger transactions and improve their financial outcomes.

The deal’s strength helps keep lenders and other third party businesses content with investing. Sometimes you can put on a better face when negotiating by providing proof of funds. But ultimately it can sometimes come down to lender evaluations in the 5 C’s of Credit.

This involves analyzing many parts of a deal. The loan only goes forward if every piece is working smoothly. Ultimately, when you do things strategically you might do something really exciting, and actually bring an investment full circle.

FAQs about commercial transactional funding

What is transactional funding for commercial real estate?

Transactional funding for commercial real estate is a short-term loan option used by investors. It helps with buying and then rapidly selling commercial properties. By bridging this gap, it helps keep investors ready for properties.

What are the three main types of funding?

The three main types of funding usually talked about are equity financing, debt financing, and grants. Sometimes you see things that could fit within a range like; Bank Loans and friends and family. Other ways of investment money lending could come as; equity investments, venture debt or even revenue-based financing.

What is an example of a funding transaction?

An example of a funding transaction could be when an investor finds a warehouse being sold under market value. They use short-term funding to purchase it. Then that same investor resells immediately at market price, or slightly below to help incentivize a cash buyer to also quickly close.

What are the requirements for transactional funding?

To get transactional funding, you typically need a motivated seller, a ready buyer, and a double closing deal. These deals depend heavily on both legs, including the B-C deal, but A to B should be analyzed also. But with a motivated Buyer C with funds, it proves that deal strength exists and helps avoid any risk.

Conclusion

In the quick paced field of real estate, staying nimble is as good as it gets. When looking to work with rapid acquisitions and sales of properties like offices or retail centers, tools like commercial transactional funding could make a big difference. Loans typically require more documentation and time, but not with this method.

While it’s important to remember the fees and due diligence it requires, the perks are big. You’re not just getting cash quickly, but building confidence by potentially having no credit verification. Next time, you’ll know more about this fast paced way of approaching funding.