Fee income on transactional funding looks great per deal and terrible per year

Question

Running the numbers on sitting on the funding side of these rather than owning anything. A funder quoting 2% flat on a $200k A-B leg collects $4,000 for money that's out maybe six hours. Per hour that's ridiculous money. But I've only got the one $200k, and the deals show up when they show up. Eight of them in a year is $32,000, call it 16% gross on capital that sat in a bank account for 51 of those weeks doing nothing at all. So is anyone underwriting this as a yield business on its own, or is it strictly a bolt-on for people who already lend and happen to have idle balance sitting there? What's realistic flow per wholesaler relationship?

Rena Expert · Accepted Answer

Cairn has the right frame. Duration is hours, so the measure is closings per month rather than months outstanding. The same $200k that funds one closing Monday morning is back before Monday afternoon and available Tuesday. A funder doing four closings a month at $2,500 to $4,000 each on a single $200k line is running a completely different business from your eight-per-year sketch, and the gap between those two outcomes comes down to deal flow. Pricing barely matters there.

Which means the number you actually need is how many double closes your wholesalers put on the calendar per month, and how many of those you win against the other funders they call. The fee is secondary. That's a relationship question and it's lumpy. Most people who do this seriously carry several wholesaler sources because any one of them goes cold for a month at a time.

The part that breaks the recycling math is a closing that doesn't repay the same day. If the B-C leg falls apart after you've funded, your hours-long loan becomes a property you have a lien on and a note from a wholesaler with no balance sheet. Your capital is then locked for however long resolution takes in that state, which can be months, and every closing you would have funded in that window is gone. One of those wipes out a year of fees, so price the fee against the failure cost rather than against the six hours.

Also expect fee compression. The service is easy to enter and the flat fee is the only variable a wholesaler shops on.

renee_dubois · Answer

The 51 idle weeks are doing all the damage in your math. My building reserves sit in a money market and already earn something, so the fee has to beat that plus the tail risk, not beat zero. What I'd want to know is whether the same $200k can fund two or three closings in a single week as long as they fall on different days, because if it can, your denominator isn't a year, it's a calendar.

dpatel_re · Answer

I don't underwrite the six hours at all. The number I look at is the A-B price against as-is value, because if the C wire fails that price is what I own. $200k has to be a number I'd lend on for twelve months, or the 2% is just a fee for accepting an unpriced tail.

aaron_fitz10 · Answer

Where are you finding eight of these a year? Both wholesalers I've talked to in my market assign everything and neither has ever taken title. If assignment is still legal where you are, the double close population might be small enough that this isn't a business yet.

chriswalton8 · Answer

The spread question limits it too. If the wholesaler pays you 1 to 2 points plus two sets of closing costs and transfer tax twice in states that charge it, the deal needs a fat margin before your fee even fits. Thin $8k spreads never reach you.

dmitri_v6 · Answer

What gets signed and recorded on your leg? I've seen it described as a note plus a recorded mortgage or deed of trust on the A-B deed, and I've also seen it described as an escrow advance with nothing recorded because both deeds hit the recorder minutes apart. Recording practice varies by state and those two are not the same position if the B-C leg dies. Marlow, if you're pricing this, that's the document I'd nail down first.

sonia_alvarez · Answer

Before I'd commit $200k I'd want closings per month per relationship, in writing from the wholesaler's own settlement statements. At 0.5 per month the fee income doesn't survive one bad file.

Fee income on transactional funding looks great per deal and terrible per year

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