Transactional Funding for Real Estate: How to Use It to Close Double Deals
How to fund back-to-back closings without risking your own capital.
Austin Beveridge
Tennessee
, Goliath Teammate
Are you a real estate investor looking to close double deals but struggling with cash flow? Transactional funding might be the solution you need. This short-term financing option allows you to buy a property and sell it almost immediately, bridging the gap between your purchase and sale without needing your own capital upfront.
Quick Answer: Transactional funding is a short-term loan used to finance the purchase of a property that you plan to sell quickly. To use it effectively, identify a property, secure a buyer, and then approach a transactional lender to cover the purchase cost. Once the sale closes, the loan is paid off, allowing you to profit from the deal without upfront capital.
What is Transactional Funding?
Transactional funding is a type of short-term financing specifically designed for real estate investors. It allows you to purchase a property with the intention of selling it almost immediately, often within the same day. This financing method is particularly useful for wholesalers and those engaged in double closings.
How to Use Transactional Funding to Close Double Deals
Step 1: Identify a Property
Start by finding a property that you can purchase at a lower price than what you can sell it for. This could be a distressed property, a motivated seller, or an off-market deal. The key is to ensure there’s enough margin for profit after all costs.
Step 2: Secure a Buyer
Before you make an offer on the property, it's crucial to have a buyer lined up. This could be an investor or someone looking for a new home. Having a buyer ready will make the transactional funding process smoother.
Step 3: Approach a Transactional Lender
Once you have both the property and the buyer, approach a transactional lender. Provide them with the details of the deal, including the purchase price and the expected selling price. The lender will evaluate the deal and, if it meets their criteria, will provide the necessary funds.
Step 4: Close the Deals
With the funding in place, you can close on the property. After the purchase, you will then sell it to your buyer. The lender will typically require that the sale closes shortly after the purchase to minimize risk.
Example Scenario
Imagine you find a property listed for $100,000. You have a buyer willing to pay $120,000. You secure transactional funding to purchase the property. After closing, you immediately sell it to your buyer, paying off the lender with the proceeds. Your profit, minus fees, is $20,000 without needing to use your own cash.
Costs Associated with Transactional Funding
While transactional funding can be beneficial, it’s essential to understand the costs involved. These can include:
Interest rates: Generally higher than traditional loans.
Closing costs: Similar to traditional real estate transactions.
Fees: Some lenders may charge additional fees for processing the loan.
Checklist for Using Transactional Funding
Identify a profitable property.
Secure a buyer before making an offer.
Research and choose a reliable transactional lender.
Prepare all necessary documentation for the lender.
Understand all costs involved in the transaction.
Close the purchase and sale on the same day.
Common Mistakes to Avoid
When using transactional funding, avoid these common pitfalls:
Not having a buyer lined up: This can lead to financial loss if the deal falls through.
Underestimating costs: Ensure you factor in all fees and expenses.
Choosing the wrong lender: Research lenders thoroughly to avoid unfavorable terms.
Failing to close quickly: Delays can complicate the funding process.
FAQs
What is the typical duration for transactional funding?
Transactional funding is usually structured as a short-term loan, often lasting just a few hours to a few days. The goal is to close the purchase and sale on the same day, minimizing the lender's risk.
Can I use transactional funding for any type of property?
While transactional funding can be used for various types of properties, it is most commonly used in wholesale deals and quick flips. Lenders may have specific criteria regarding property types, so it's essential to check with them.
Do I need a credit score to qualify for transactional funding?
Many transactional lenders do not require a credit score since the loan is secured by the property itself. However, having a good credit score may help you secure better terms.
What happens if the sale doesn't close?
If the sale doesn’t close, you may be responsible for repaying the loan, plus any fees incurred. This is why having a solid buyer lined up is crucial before securing funding.
Is transactional funding a good option for new investors?
Transactional funding can be a viable option for new investors, especially those looking to enter the wholesale market. However, it requires careful planning and understanding of the process to avoid costly mistakes.
