Transactional Funding Agreement: Fast Capital for Real Estate

Real estate wholesalers often need quick capital to secure a property. A transactional funding agreement might be the very thing to get you over the finish line, as this short-term financing tool helps bridge the gap. This is where a transactional funding agreement comes into play.

You might think you understand double closings as an investor. But, maybe you haven’t fully grasped how the right agreement can make your deals better. We help customers understand how they work.

Table of Contents:

• What Is a Transactional Funding Agreement?
  • The Mechanics of Transactional Funding
  • Why Choose Transactional Funding?
  • When is a Transactional Funding Agreement Needed?
• The Role of Joint Venture Partnerships in Transactional Funding
  • Key Components of a Sound Agreement
  • Double Closings: The Two-Step Process
• Transactional Funding in Texas
  • Benefits of working with local experts in Texas
  • Selecting Your Funding Partner
• Alternatives and Complements to Transactional Funding
• FAQs about transactional funding agreement
  • What is transactional funding?
  • What is an example of a funding transaction?
  • How much does transactional funding cost?
  • Is transactional lending legit?
• Conclusion

What Is a Transactional Funding Agreement?

A transactional funding agreement is a short-term loan. It is specifically for real estate investors, predominantly wholesalers, facilitating double closings. This financial tool covers the initial purchase, with funds being repaid from the subsequent sale to the end buyer.

Unlike a traditional 30-year mortgage from a financial institution, transactional funding agreements provide speed. They also allow real estate investors to capitalize on opportunities without extensive delays. Think of it as a bridge built in hours.

The Mechanics of Transactional Funding

The beauty of transactional funding lies in its simplicity. An estate investor, “B,” secures a contract with an initial seller, “A,” and simultaneously arranges a sale to an end buyer, “C.” The funding covers the A-B transaction, and the proceeds from the B-C transaction repay the loan.

It’s a synchronized process. All this happens within a short time frame, often within the same day. Real Estate Skill’s article gives an overview for this type of transaction.

Why Choose Transactional Funding?

Why do some estate investors use transactional funding over traditional methods? Speed. Because interest rates climb daily, you do not want the delays of standard bank financing.

In early October of 2022, 30-year fixed rate mortgage rates hit 7.05 percent. New mortgage applications fell by 14.2 percent in just one week during September of the same year. Transactional funding is often favored in cases like these.

When is a Transactional Funding Agreement Needed?

If you are going after distressed or undervalued properties, this funding can give you an edge. Timing is everything. Transactional funding becomes a good move in multiple scenarios:

• When quick acquisition is needed but you don’t have readily available funds.
• If a double closing is needed because you need to protect the original price you are buying the house.
• When a traditional loan’s timeline threatens to kill a profitable deal.

The Role of Joint Venture Partnerships in Transactional Funding

Many times, transactional funding gets set up as a joint venture. Both the transactional funding lender and wholesaler have skin in the game, sharing risk and reward. So, both parties gain something in success, and losses, if any, are absorbed collectively.

A formal agreement, typically reviewed by legal experts, sets the rules. It also clarifies profit shares, dispute mechanisms, and exit options. This structure isn’t just about borrowing, but rather a team approach where clear roles and responsibilities are key to avoiding conflicts down the road.

Key Components of a Sound Agreement

A good transactional funding agreement includes clear clauses. The components must clearly state all costs.

A robust agreement outlines how and when funds get transferred. It includes contingency clauses protecting against unexpected events. Also consider an arbitration to speed resolution in a possible conflict.

Here’s a quick reference table outlining some of the key components typically included in a well-drafted transactional funding agreement.

Component	Description	Purpose
Loan Amount and Terms	Specifics of the funding, repayment timeline (often 1-3 days).	Provides the estate investor with required funding in an A-B Transaction.
Fees and Costs	Details on any transaction costs; origination fees may apply.	These typically range from 2% to 12%.
Parties Involved	Identifies all parties, defining responsibilities (the seller (A), wholesaler (B), and buyer (C).	Clearly establishes who is doing what.
Property Details	Exact identification and condition of the real estate in question.	So everyone is clear on exactly *what* is being transacted.

Double Closings: The Two-Step Process

Transactional funding is a core part of double closings. This involves an investor (B) buying a property and selling immediately.

Timing is paramount in this process. You will want the coordination of all parties, notably working closely with an investor-friendly title company and closing agent. Both estate transactions are intertwined.

Transactional Funding in Texas

Wholesaling is quite popular in Texas. There are slight state variations in real estate. Having state expertise allows estate transactions to be processed smoothly.

For example, if you’re an estate investor working within Texas, seeking a transactional funding partner who understands this landscape might lead to smoother and safer deal flow.

Benefits of working with local experts in Texas

Local transactional funding providers understand Texas laws. Navigating regional rules help transactions run better. Working with locals also offers a great level of understanding to give more context to the funding process.

Selecting Your Funding Partner

Your choice of a transactional funding partner goes beyond just getting a check. You want someone experienced in your area of the state. Finding a partner who has a deep grasp of local market dynamics adds value, as they will move quickly.

Alternatives and Complements to Transactional Funding

Bank loans may be the best path for some. Using other people’s money (OPM) can offer flexibility. But sometimes finding alternative methods can give added value.

The process of evaluating all options show potential growth in an investment strategy. Leveraging these additional strategies can really build long-term, sustainable success as part of a larger strategy in investing. Platforms like BiggerPockets give guidance.

FAQs about transactional funding agreement

What is transactional funding?

Transactional funding is a short-term loan option. It’s designed for real estate investors, specifically in cases involving “double closings” or “back-to-back closings.”

What is an example of a funding transaction?

A funding transaction occurs when a real estate investor, acting as a middleman (let’s call them “B”), identifies a property being sold by an original seller (“A”) at a favorable price. Then the investor arranges for an end buyer (“C”) to purchase it at a higher price immediately after.

How much does transactional funding cost?

Costs can fluctuate but commonly run from 2% to 12% of the overall borrowed amount. Added charges, such as an origination fee, could apply as well.

Is transactional lending legit?

Yes, transactional lending is legit. It must adhere to relevant federal, state, and local laws concerning real estate and financial transactions.

Conclusion

The transactional funding agreement supports double closings from a seller (“A”) to an investor (“B”) then immediately to an end buyer (“C”). A funding provider will use a term loan, and there could be an origination fee to cover this process. These agreements offer real estate investors the ability to participate in these types of property deals that provide liquidity and short-term gain.

Real estate wholesalers need to work with a transactional funding lender, and having a solid proof of funds letter helps too. Working with the right capital partners that can act as a hard money lender can be a huge help to get your real estate deals across the finish line. Using a transactional funding loan from a private money lender helps you complete back to back closings easier to ensure the deal gets done, as you purchase from the original seller to you and then to the end buyer at a higher price, using a solid escrow account managed by a closing agent.