Transaction funding is a loan against the cash from a third party in the transaction.
Transaction loans are not secured by the real estate in the transaction. If it were, it would be a real estate loan. And, since the expected duration of the transaction is generally 24-72 hours, it does not fit the criteria of a real estate bridge loan. Beyond 72 hours, it is considered extended transactional funding.
Understandably, the reason for the loan is to change the name on the real estate title to legalize transfer of property ownership. The process gives an investor the capital they need to purchase a property at a discounted purchase price and resell it for a higher price in the same transaction.
The margin spread between the discounted purchase price, plus the discounted purchase price, and the resell price must be of an amount to pay for the purchase price, cost of the transaction loan, title fees and hopefully a nice profit to investor.
The borrower of a Transactional loan does not need good credit or a down payment. But will usually be required to post an earnest money deposit for the seller.
Transactions requiring more than 72 hours to process the close of third party's deposit of cash for close of the end resale contract are considered extended transactional funding.
Depending on the potential profit to be made by the investor, it may be worth securing a short term bridge real estate loan to obtain title to the property rather than let the seller sell a good deal to someone else?
Investor will need at least a 10% cash down payment to secure the loan plus closing cost.
Since there is no prepayment penalty the loan can be paid off at any time. Or, as soon as the third party purchaser is ready to close.
Where unit cost /value is less than $50,000 a credit line may be used to capitalize the acquisition and rehab.
While this may work well on acquiring groups of properties, where the capital need exceeds $2.5-$10 million, credit lines have a minimum loan requirement of $2.5 million.
Using this method of transaction financing, we finance the third party purchaser for the amount of the real estate purchase-sale contract with investor less required cash down payment.
With resell buyer financing the investor does not need financing to acquire title to the property. Investor`s contract with third party purchaser becomes a lien against proceeds of the third party's loan affected by assignment of real estate contract between investor and owner (seller) of property.
The advantages are: Only one loan is needed for the transfer of title and third party purchase. And, the loan fees are much less.
Interest rate for this type loan varies from 5.5% - 12%. Subject to qualifications. These are not owner-occupied type loans.
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