Transactional funding is another type of short-term loan specifically geared towards wholesalers. It allows for the quick purchase and resell of an investment property to occur on the same day.
Also known as “flash funding” or same-day funding, it’s a unique financial strategy. It enables real estate investors to take out a loan, purchase a property, and repay the loan quickly. Often, they repay as fast as a week or even on the same day.
To repay the loan, they use the profit of the investment. With the brief nature of these loans, they are perfect for real estate deals where a buyer expects to close and resell within a short period of time.
Our Houston transactional funding process involves several key agents.
At Pioneer Hard Money, we provide same-day funding Houston investors rely upon. However, this process requires an intermediate agent, which is the real estate investor or real estate wholesaler. Moreover, it requires an established end buyer in place to complete the deal.
Simply put, this process only works when every person in the transaction is ready to make a deal. As an REI, you can use flash funding to purchase any real estate. It merely requires that the closing agent is ready to facilitate the deal.
Let’s look at an example of our process in action. You, a Houston-based real estate wholesaler, have a buyer moving to Texas from Arkansas. Quickly, you identify a property in need of minor repairs and negotiate a sale at $300,000.
Next, you draft a contract for that property showing that the property will sell to the end buyer for $350,000. Pioneer Hard Money provides the transactional loan, and you coordinate the closing dates.
It takes $10,000 to pay contractor and lender fees. When you close, you have a profit of $40,000, all made without a cent of your own funds.
Wholesaling involves purchasing properties at a discount to sell them for profit to an investor who also plans to make a profit. Transactional Funding is sometimes called an “AB-BC” or “double close” transaction.
Party A, the property seller, sells to Party B, the wholesaler.
Party B then sells to Party C, the end buyer, on the same day.
Sometimes wholesalers need funding to perform same-day transactions in which they close a purchase contract to complete the “assignment of contract” or sales of contract property to the end buyer. Texas wholesalers commonly use this type of short-term loan for three reasons.
1. Non-Assignable Contract: The property that the wholesaler wants to purchase is not assignable to a third party. This means that the property the wholesaler is planning to flip and “assign” to the end buyer is most likely owned by a government agency, REO, Fannie Mae, Freddie Mac, etc.
2. Transaction Creditability: When a wholesaler uses transactional funding, it allows the seller to perceive them as the end buyer or cash buyer at the closing table. Instead of showing the property on the cash investors’ schedule or being perceived as the go-between or representative of the buyer or sellers, they deal with scheduling cash investors to show the property (which sometimes upsets the seller) and hoping they close on time.
3. Non-Disclosure of Assignment Fee: There are times when as a wholesaler, you will make a great deal of profit on a wholesale deal, and the end buyer may not want to do the deal because he sees the assignment fee is too high. When you choose transactional funding, the profit on the sale is not disclosed on the closing statement.
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