What Is Transactional Funding in Real Estate and When to Use It
Understanding short-term funding for wholesale and double-close deals.
Austin Beveridge
Tennessee
, Goliath Teammate
Are you a real estate investor looking for quick financing solutions? Understanding transactional funding can be a game-changer, especially when you need to close deals fast without tying up your own capital. In this article, we’ll explore what transactional funding is, when to use it, and how it can help you seize profitable opportunities in the real estate market.
Quick Answer
Transactional funding is a short-term loan used to facilitate the purchase of a property, allowing investors to close deals quickly without using their own cash. It is typically used in double closings, where the investor buys a property and sells it almost immediately for a profit. This type of funding is ideal when you need to act fast to secure a deal, especially in competitive markets.
Understanding Transactional Funding
Transactional funding is a financial tool that allows real estate investors to buy properties without upfront capital. It’s often used in situations where an investor needs to close a deal quickly, such as in a double closing scenario. Here’s a deeper look into how it works.
How Transactional Funding Works
In a typical transactional funding scenario, an investor identifies a property they want to buy and then arranges for a quick loan to cover the purchase price. The investor usually sells the property to a third party shortly after the initial purchase, using the proceeds from that sale to repay the loan. The entire process can happen within a matter of hours or days.
When to Use Transactional Funding
Transactional funding is particularly useful in various scenarios:
Double Closings: When you buy and sell a property in quick succession.
Flipping Properties: To secure a property quickly before making renovations.
Competitive Markets: When you need to act fast to secure a deal against other buyers.
Costs Involved in Transactional Funding
While transactional funding can be beneficial, it’s important to understand the costs associated with it. Here are some common expenses:
Interest Rates: These can be higher than traditional loans due to the short-term nature.
Fees: Lenders may charge origination fees and other closing costs.
Title Insurance: This may be required to protect against claims on the property.
Example Scenario
Imagine you find a distressed property listed at $100,000. You know it’s worth $150,000 after repairs. You secure transactional funding to buy the property quickly. You close the deal in 24 hours, make necessary renovations, and then sell it for $150,000 within a month. After paying back the loan and covering your costs, you pocket a nice profit.
Checklist for Using Transactional Funding
Identify a property with potential for quick resale.
Secure a reliable transactional funding lender.
Understand all associated costs and fees.
Prepare necessary documentation for the lender.
Have a buyer lined up for a quick resale.
Common Mistakes to Avoid
When using transactional funding, there are several pitfalls to watch out for:
Not Having a Buyer: Failing to secure a buyer before closing can lead to financial loss.
Ignoring Costs: Underestimating fees can eat into your profits.
Choosing the Wrong Lender: Not all lenders offer favorable terms; do your research.
FAQs
What is the typical duration for transactional funding?
Transactional funding is usually short-term, often lasting just a few hours to a few days, depending on the closing timeline of the associated property sale.
Can I use transactional funding for any property?
While you can use transactional funding for various properties, it’s most effective for deals where you can quickly resell or flip the property.
What are the risks associated with transactional funding?
The main risks include not securing a buyer in time and incurring higher costs than anticipated, which can reduce or eliminate profits.
Do I need good credit to qualify for transactional funding?
Many lenders do not require good credit for transactional funding, as the loan is secured by the property being purchased.
Is transactional funding suitable for beginners?
While it can be beneficial, beginners should fully understand the process and risks involved before engaging in transactional funding.
