Transactional funding provides very short-term financing to bridge a transaction between a seller and buyer. Learn how it compares to hard money loans.

The length of a loan term is one of the most important factors distinguishing one type of real estate financing from another. Long-term financing can have terms that last decades, such as 30-year home mortgages. Short-term financing includes loans with terms of six months to two years, but it also includes loans with terms measured in hours.

Transactional funding provides capital to purchase and flip real property. The borrower might be a real estate investor who has a buyer lined up and needs quick financing until the buyer’s loan funds. Hard money lenders may provide transactional funding to qualified borrowers.

If you’re interested in learning more about funding a real estate project quickly, Capstone Capital Partners is more than happy to answer your questions.

A quick comparison table between transactional funding and hard money lending

	Transactional Funding	Hard money loans
Purpose of loan	Bridging a transaction between a seller and a buyer in less than a week with no modifications or repairs to the property.	Obtains capital for a variety of real estate projects that may require several months to a couple years.
Loan term	1 to 5 days	Typically between 6 months and 2 years
Loan amount	Varies widely, but often less than hard money loans	Varies widely, but often more than transactional loans
Down payment	Often 0%	As little as 10%
Loan-to-value	Up to 100%	ARV (after-repair value) is more commonly used. ARV may be up to 75%
Interest rate	May vary widely; 2% to 12%	10-12% interest rates and 3-4% in points
Origination fees	Around 1% to 3% of the loan amount; rates dependent on loan amount	Sometimes up to 5%
Time to loan approval	Often measured in hours	As fast as 7 days with efficient lenders

What is transactional funding?

Transactional funding provides capital for a specific real estate transaction. It’s also known as “flash” funding or “same-day” funding. An investor uses the money from the transactional funding lender to purchase a property. They will then sell the property to a buyer within a few days.

If you plan to make updates to the property – repairs, improvements, etc. – transactional funding is not the right option for you due to its ultra short duration. You’ll want to steer toward a hard money loan.

The lender doesn’t want to be involved in the deal for longer than about 72 hours. That should be the length of time from when the lender provides the funds to the investor to when the investor’s buyer closes on their purchase of the property. Some of the funds from the buyer go to the transactional funding lender to repay the loan. The investor keeps the rest as profit.

The investor uses the money from the transactional funding loan to bridge the transaction from their purchase to another buyer. That buyer must already be under contract with proof of funds when the transactional funding loan takes place.

What is real estate wholesaling?

Real estate wholesaling bears some similarities to transactional funding. Both involve quick real estate transactions. In Texas, real estate wholesaling often consists of two key steps:

A wholesaler enters into a contract to purchase a property from a seller.
The wholesaler assigns the contract to a buyer in exchange for a fee paid by the buyer.

A wholesaler can make money on this type of deal without having to invest much of their own money. They never hold title to the property. The title passes directly from the seller to the buyer.

This process is legal in Texas, but it is subject to regulation by the Texas Real Estate Commission. This is the state agency that licenses real estate agents and brokers. Wholesalers must disclose to any prospective buyer that they are not the property owner.

How is transactional funding different from wholesaling?

Both wholesaling and transactional funding allow the person in the middle to make a return without risking much of their own capital. Unlike wholesaling, the borrower/investor in a transactional funding deal owns the property for a short time. The transactional funding lender makes this possible. The title passes twice, first from the seller to the investor, and then from the investor to the buyer. These two transactions occur, at most, within a few days of each other.

How is transactional funding different from hard money lending?

Transactional funding differs from hard money loans in a few different ways:

Transactional financing loans focus on the transaction from the seller to the buyer over a few days.
With a hard money loan, a borrower/investor is buying a property that they intend to hold for anywhere from six months to a few years.
Getting approved for transactional funding hinges more on the transaction itself. Lenders will consider the borrower’s contract with the buyer and the buyer’s proof of funds.
Approval for a hard money loan center on the property itself, which provides a hard asset to secure the loan. Lenders will want more information about the property and the project.

When is transactional funding a better option than a hard money loan?

For real estate investors, transactional funding can provide returns at low risk, and with very little money paid upfront. They work best for short-term deals in which the investor is essentially holding the property while the end buyer waits for their loan to fund. The investor needs to have the buyer lined up to get approval from a transactional funding lender.

A hard money loan works better for projects that may require a number of months or years to complete. If the investor must arrange or perform any work on the property that will take more than a day or two, the timetable of a typical transactional funding loan will be too short.

Learn more about funding options for real estate

One thing is for sure: there is no shortage of financing options for real estate projects. If you’re still unsure which option is best for you, Capstone Capital Partners is here to help. Simply answer a few easy questions about yourself and the type of project you may want to fund. We’ll be in touch!

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Transactional Funding vs Hard Money: Which Do You Need?