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Proof of funds is simply the verification you provide to show you have the money required for a transaction. For example, in real estate, a seller may ask you to provide proof of funds to show that you can cover the costs of purchasing a home.
Proof of funds can be requested whether you’re opting for a mortgage or buying the property with cash; in either case, the seller and lender will want to know that you can finance the transaction.
If you’ve been involved in real estate beyond just buying and selling your primary home, you might have heard the term transactional funding or transactional loans. Transactional funding is not as commonly known as some other forms of financing, but it is definitely a valuable addition to your arsenal of loan options.
Understanding what these loans are, how they work, and the pros and cons of using them will help you evaluate when they might be a good fit for your investment strategy.
Transactional funding is a short-term, hard money loan that allows a wholesaler or investor to purchase a property without using any of their own funds. Lenders provide 100% of the required financing, as long as the borrower can prove that there is another end buyer in place to purchase the property within a short time frame.
Some transactional lenders allow for a loan period of only 24 hours, but most provide a timeframe of two to five days. Transactional funding is a great way to do a fast flip, and can be highly profitable if done correctly.
Transactional loans are also sometimes referred to as flash funding, same-day funding, or ABC funding.
Transactional funds are loaned by a private, hard money lender, and can be used on any type of real estate.
Transactional funding works when there are three parties involved (besides the lender). This is where the term ABC funding comes from: The original owner and seller is “A,” the investor is “B,” and the end buyer is “C.”
Transactional funding works like this:
Both transactions will be fully funded and take place within a couple of days of each other.
A final consideration is closing costs, and it’s up to the investor to be aware of the details his/her lender requires. Many lenders will cover all closing costs associated with the A-B sale, and their fees can range from $1,500 to $5,000 per transaction. All of the lender’s costs and fees will be deducted from the investor’s profit at the closing table.
Typical examples of properties that are flipped using transactional funding can include:
For example, if an investor is working with a buyer who wants to move to Texas from out of state, the investor will look for properties. The investor finds a house in Texas that needs a quick face lift and negotiates a price of $200,000.
The investor signs a contract with the end buyer, to sell the property to the buyer for $250,000. The investor secures a transactional loan and coordinates closing dates, along with any minor work that can be done in one or two days.
After two closings, the investor’s profit starts at $50,000 — minus lender and any contractor fees. Fees from hard money lenders vary, but assuming a 15% for closing costs and another 2% loan fees, our investor walks away with over $40,000 and didn’t have to invest any of their own money.
There are a lot of benefits for the investor who knows how to organize transactional funding:
There aren’t really “cons” or “disadvantages” to transactional loans. There are, however, some aspects of transactional funding designed to protect the other parties involved, which can be difficulties for investors.
Qualifying for a transactional loan is much easier than qualifying for a traditional loan. It’s generally even easier than qualifying for other types of hard money loans. Credit checks, appraisals, proof of employment, etc., are not required.
What you do need:
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