Transactional Funding for Double Closings Explained
transactional-funding-for-double-closings-explained
Austin Beveridge
Tennessee
, Goliath Teammate
Are you looking to close a real estate deal without having the cash upfront? If so, you’re not alone. Many investors face the challenge of funding double closings, and transactional funding can be a game-changer. This guide will help you understand how transactional funding works, its benefits, and how to use it effectively.
Quick Answer
Transactional funding is a short-term loan used to finance the purchase of a property that you intend to sell immediately. This type of funding allows you to buy a property and sell it to another buyer on the same day without using your own cash. To secure transactional funding, you typically need a signed purchase agreement and a buyer lined up for the property.
What is Transactional Funding?
Transactional funding is a financial tool designed specifically for real estate investors engaging in double closings. A double closing involves two transactions happening back-to-back: the purchase of a property and its immediate resale. Transactional funding provides the necessary cash to buy the property temporarily, allowing you to sell it to another buyer without needing your own capital.
How Does Transactional Funding Work?
In a typical scenario, you find a property under market value and secure it under a purchase agreement. You then find a buyer willing to pay a higher price. With transactional funding, you can close on the first property, and then immediately sell it to your buyer, using the proceeds from the sale to pay back the loan.
Steps to Secure Transactional Funding
Identify a property you want to buy and secure it under a purchase agreement.
Find a buyer for the property who is ready to purchase it immediately.
Contact a transactional funding lender to discuss your needs and terms.
Provide the lender with necessary documents, including the purchase agreement and buyer's commitment.
Close on the property using the funding, then immediately close the sale to your buyer.
Costs Involved in Transactional Funding
While transactional funding can be a lifesaver, it does come with costs. Typically, you can expect to pay:
Interest rates ranging from 1% to 3% for the duration of the loan.
Closing costs, which may include fees for title insurance and other closing services.
Potential lender fees, which can vary based on the lender's terms.
Timeline for Transactional Funding
The timeline for securing transactional funding can be quite short:
Application and approval can take as little as a few hours to a couple of days.
Closing on the property can often be completed in one day.
Alternatives to Transactional Funding
If transactional funding doesn’t seem right for you, consider these alternatives:
Hard money loans, which can provide quick cash but typically come with higher interest rates.
Private money lenders, often friends or family, who might offer more flexible terms.
Using your own cash or lines of credit if available, though this ties up your funds.
Checklist for Using Transactional Funding
Have a signed purchase agreement for the property.
Secure a buyer for the property before applying for funding.
Research and choose a reliable transactional funding lender.
Gather all necessary documentation for the lender.
Understand the costs involved and ensure they fit your profit margin.
Common Mistakes to Avoid
When using transactional funding, avoid these common pitfalls:
Not having a buyer lined up before securing funding can lead to costly delays.
Overlooking the total costs associated with the funding can eat into your profits.
Failing to read the fine print of the funding agreement may result in unexpected fees.
Frequently Asked Questions
1. What is the difference between transactional funding and hard money loans?
Transactional funding is specifically for short-term use in double closings, while hard money loans are generally used for longer-term investments and can take longer to secure. Transactional funding is usually paid back within a day, while hard money loans are often repaid over several months or years.
2. How quickly can I close a deal using transactional funding?
Many transactions can be completed within a single day, especially if all parties are prepared and the necessary documentation is in order. The speed of the process makes it an attractive option for investors looking to capitalize on quick deals.
3. What types of properties can I use transactional funding for?
Transactional funding can be used for various types of properties, including residential, commercial, and even land deals. The key is to ensure that you have a buyer ready to purchase the property immediately after the initial acquisition.
4. Are there any risks associated with transactional funding?
Yes, risks include the possibility of not finding a buyer in time, which could leave you responsible for the loan without a way to repay it. Additionally, costs can add up quickly if not managed properly, affecting your overall profit.
5. Can I use transactional funding if I have bad credit?
Yes, many lenders offering transactional funding do not consider credit scores as heavily as traditional lenders. However, they may require a solid purchase agreement and a reliable buyer lined up to mitigate their risks.
