If you are interested in real estate investment or flipping houses, you might wonder how people fund these projects. While there are a few different solutions available, real estate professionals use one creative strategy: transactional funding.
When you need to conduct a double closing, this type of funding is a great way to handle it. It involves a short-term loan that you repay quickly, often within the same day. Occasionally, you might take a week to pay it off, so you need to find a lender to work with your schedule.
With access to this financing, real estate wholesalers can buy and sell properties quickly without touching their own money.
How Does It Work?
A private or hard money lender typically provides a loan when you have an established, documented end buyer. It requires the end buyer to be ready to buy the property immediately after you purchase it from the original seller. Then, you use the sale proceeds to pay back the loan.
So long as the closing agent is willing to facilitate both transactions and the lender can verify the details before providing funds, wholesalers can use this type of loan with virtually any form of real estate.
Let’s break down how it works.
1. You find a motivated seller, and both parties agree to a below-market price. (A-B)
2. Once you have an end buyer, they sign a new purchase agreement (B-C). This means they purchase the property at a higher price, closing on the same day as the A-B transaction.
3. You work with a lender to secure the transactional funding loan and buy from the seller.
4. Once both transactions occur, you repay the loan with the proceeds of the B-C translation and keep the difference.
The Benefits of Transactional Lending
There are several benefits to using this type of loan for a double closing.
• A double close keeps a clear separation between the seller and end buyer, reducing the opportunity for them to cut you out.
• The wholesaler has equal footing with “cash for houses” buyers, giving them a competitive edge.
• Typically, the loan covers 100% of the purchase price, so you don’t put down your own money.
• Lenders often don’t require appraisals or title insurance, so there are fewer costs and fees that cut into the profit.
• Usually, this is less expensive than a hard money loan and fees paid at closing.
• Funding occurs within days, making it ideal for a quick closing process.
• You can use this loan for any property: land, single-family homes, REOs, and commercial property.
For many people, the advantages outweigh the disadvantages. However, it’s good to be aware of the potential pitfalls.
• Some title companies and end buyers don’t want to work with this type of funding.
• If the deal doesn’t close within the timeframe, fees and interest can be expensive.
• Transactional loans are short-term, often expected to be paid in full in 1-3 days.
The Bottom Line
When you understand how and when to use this type of loan, you have a savvy way to approach real estate investments. Whether you want to flip houses or find long-term passive income, finding a dependable strategy can serve you well!