When you wholesale real estate, your job boils down to finding properties for other investors. In most cases, you don’t buy real estate. You simply get a property under contract at below market value and then sell that contract to a cash buyer. This is why wholesaling is so attractive to new investors–it doesn’t involve buying property or a lot of financial risk.
However, not all wholesale real estate deals end with you selling a contract to a cash buyer. In some cases, identifying a buyer and agreeing upon a price is just one of the last steps. What really ends the process is when you close with the seller and then hold a separate closing with the buyer. This is known as double closing, and it’s a popular strategy among investors who want to maximize their assignment fee or avoid conflict between the buyer and the seller.
Of course, in order to double close, you’ll need to buy the property in question. Thankfully, this strategy isn’t limited to investors who already have money. There’s a type of private loan called transactional funding that makes double closing possible even for new investors with no cash or capital.
In this blog, we’re going to explore what transactional funding is, why it’s important, and how you can secure it in order to double close on a wholesale real estate deal.
What is transactional financing?
Transactional financing, also known as gap funding or bridge financing, is a hard money loan that a wholesaler takes out in order to double close on a house. As the name suggests, it literally funds the transaction, allowing the wholesaler to close on the property.
As you can imagine, transactional financing is not a long-term loan. It’s usually lent in 30- or 90-day terms, which gives the wholesaler time to close the deal, sell it to a buyer, receive proceeds from the sale, and then pay back the loan.
Why would someone double close and seek transactional financing?
On the surface, double closing may seem like an added step to a simple wholesaling process. When you add a private loan into the mix, you may wonder why anyone would go this route. However, there are several reasons that a wholesaler may choose to double close instead of simply seeking an assignment fee.
The first is to avoid conflict with either the buyer or the seller. Sometimes, a seller will be fine with a deal up until the moment they realize just how much money you’re making off of it. If this happens, the seller may back out of the deal entirely. However, if you double close, you won’t have to worry. You’ll simply buy the property for the contracted price, and that will be the end of the story for the seller.
On the other hand, when buyers know how much you bought a property for, your assignment fee may suffer since they’ll naturally try to haggle for a better price. However, when you double close, the only price your buyer will see is the one you charge them. They have no way of knowing how much you paid for the deal, so they can’t take issue with how much profit you make.
The second reason for double closing is to avoid conflict between the buyer and the seller. Wholesale deals rely on building rapport and relationships with motivated sellers. While you should explain the process thoroughly to the seller, there’s no guarantee that they’ll understand how it works. When you’re not the buyer who shows up on closing day, the seller may feel misled or duped, which can create conflict and disrupt the deal. Double closing avoids that possibility entirely by ensuring that the buyer and seller aren’t in a closing together.
Securing a transactional loan
Now that you understand why you would double close, you may be thinking that it’s a good strategy to keep in your toolbox. So how does transactional funding work? First, you need to identify one or more private lenders that you want to work with. Ideally, this should be your first step before you start looking for deals. It won’t do you any good to find an opportunity and then lose it because you can’t get funding.
The best way to find a lender is to do a quick search or ask around in your local real estate community. Before making a decision, you should also vet private lenders by verifying their reputation with experienced investors in your community.
Once you identify a lender you can trust, you’ll usually submit your deal to them with the following information, at a minimum:
- Contracted price
- Property damage
- Requested loan amount
Of course, the information you need to submit will vary depending on the lender you’re working with. However, the lender will generally want to know the state of the property and the ARV you’ve calculated so they can decide whether or not loaning you the money is a worthwhile investment.
All of this is important information to a transactional lender because they make money in two ways. First, transactional loans come with high interest rates and fees. However, they’re risky for the lender because they’ll lose money if your deal falls through. To counteract this risk, transactional lenders hold the property you’re buying as collateral, meaning that if you can’t sell the deal and pay them back, they’ll have a legal right to possess the property. Therefore, the lender will want to ensure it’s a property they can make money on if you default on the loan.
The third step in obtaining transactional funding for a real estate purchase is a credit score check. Because the lender ideally wants to make a profit with interest and fees instead of a distressed property, they’ll want to make sure you have a solid financial history.
Once everything checks out, they’ll wire you the money in time for closing so you can purchase the property and immediately sell it to a cash buyer. Then you’ll repay the principal plus the interest and fees agreed upon in the financing contract.
Before we move on, it’s worth noting that transactional financing isn’t all or nothing. Borrowing money to complete a transaction doesn’t mean you have to borrow the full purchase price. If you have some cash on hand, you may be able to borrow enough to cover part of the purchase price or even pay for your closing costs. If you’re doing a traditional wholesale deal, you may even be able to take an EMD loan, which covers the earnest money deposit. This is one of the reasons that transactional financing is so popular–it’s usually much more flexible than a traditional mortgage.
Getting started in real estate can seem like a daunting task. In fact, far too many people never consider real estate as an option simply because they think they don’t have enough cash. However, virtually anyone can get involved in real estate investing, because there are options that don’t require you to buy property with your own money.
The most popular option among new real estate investors is wholesaling, simply because it doesn’t involve buying property. However, there are times when you’ll want to close on a property yourself to protect your deal and profits. In these cases, transactional funding makes it possible to buy and sell real estate by leveraging someone else’s money.
Of course, transactional funding comes with its own set of risks, so you should carefully consider all the options before you agree to a private money loan. However, double closing is an important option in the real estate world, and having a private lender on speed dial may just pocket you a large check one day, even if you never intended to use their services.