What Is Transactional Funding in Real Estate?

Transactional funding in real estate offers a specialized, short-term financing solution for investors engaging in specific property transactions. It is primarily utilized for back-to-back or double closings. Its core purpose is to enable a real estate investor to quickly acquire a property and immediately resell it to another buyer without using their own capital for the initial purchase. This funding is intended for very brief durations, often completing within the same day or a few days.

Understanding Transactional Funding

Transactional funding represents a distinct approach to real estate financing, typically provided by private lenders or specialized funding companies rather than traditional banks. This lending is characterized by its asset-based and deal-specific nature. Lenders primarily assess the strength of the specific transaction, focusing on the spread between the purchase price and the resale price, rather than evaluating the borrower’s personal credit history or other assets. This focus on the deal’s profitability allows for a more streamlined approval process compared to conventional loans.

Transactional funding is almost exclusively employed in a “double closing” or “simultaneous closing.” This process involves two distinct real estate transactions occurring either concurrently or within a very short timeframe. The key parties involved include the original property seller (Party A), the real estate investor or wholesaler (Party B), the ultimate end buyer (Party C), and the transactional lender. The transactional lender provides the short-term capital that enables the investor (Party B) to purchase the property from the original seller (Party A), with the understanding that the property will be immediately resold to the end buyer (Party C).

Transactional funding is particularly useful for real estate wholesalers who identify distressed properties or motivated sellers willing to sell at a reduced rate for a fast closing. The wholesaler then secures an end buyer, often another investor, who is prepared to purchase the property at a higher price. This financial tool allows the wholesaler to facilitate the transaction and profit from the spread without having to use their own money for the purchase. It also offers benefits such as covering 100% of the purchase price, including closing costs, and often does not require traditional credit checks or income verification. This makes it an accessible option for many real estate professionals.

The Funding Process

The utilization of transactional funding begins when a real estate investor identifies a property with a motivated seller (Party A) and secures a ready end buyer (Party C) for that property. The investor, acting as an intermediary (Party B), enters into a purchase agreement with the original seller to acquire the property. Concurrently, the investor executes a separate purchase agreement to sell the same property to the end buyer at a higher price, establishing the profit margin for the transaction.

Once both purchase agreements are in place, the investor then secures transactional funding for the initial purchase from the original seller. This funding is specifically designed to provide the capital needed for the first leg of the transaction, allowing the investor to take temporary ownership of the property. The first closing then occurs, where the investor purchases the property from the original seller using the funds provided by the transactional lender.

Immediately following the first closing, or even simultaneously, the second closing takes place. In this transaction, the end buyer purchases the property directly from the investor. The proceeds from this sale are then used to repay the transactional funds, along with any associated fees, to the transactional lender. This sequence ensures that the transactional loan is repaid very quickly, often within hours or on the same day, relying on the seamless transfer of funds facilitated by a title or escrow company. The title company plays a central role by coordinating both closings and handling the financial disbursements to ensure a smooth, single-day transaction flow.

Costs and Requirements

The fees associated with transactional funding are typically structured as a flat fee or a percentage of the loan amount, commonly ranging from 1% to 3%. Some lenders might charge a minimum fee, for example, $1,000, or a processing fee. Due to the extremely short duration of these loans, which can be as brief as a few hours or a few days, traditional interest rates are often not the primary cost factor; instead, the flat or percentage-based fees are paramount. These costs are generally paid at the second closing, directly from the proceeds of the sale to the end buyer.

To qualify for transactional funding, lenders focus on the viability and profitability of the deal itself rather than the borrower’s personal financial standing. A clear exit strategy is essential, which means having a committed end buyer already in place. Lenders require proof of this committed buyer, often in the form of an executed purchase agreement for the second transaction.

A significant requirement is a substantial profit margin between the initial purchase price and the resale price. This spread must be sufficient to cover all associated costs, including the transactional funding fees, and still ensure profitability for the investor. The property must have a clean title, free of liens or encumbrances, to facilitate a smooth and swift transfer of ownership. Lenders require specific documentation, which includes the purchase agreements for both transactions, proof of the end buyer’s ability to close, and clear title work for the property. Some lenders may also provide a proof of funds letter for the investor to present to the original seller.