How to fund transactional closing costs

What transactional funding actually covers

Transactional funding is for the purchase price of the first leg of a double close. It is a short-term loan that gets repaid within hours from the sale of the second leg. The lender provides the capital to buy the property from the seller, then you immediately sell it to your end buyer.

This type of funding is generally not designed to cover the various fees and expenses associated with closing both transactions. These are separate costs that you, as the investor, are responsible for managing. Understanding this distinction upfront is crucial for proper deal planning.

Understanding the two sets of closing costs

A double close involves two separate closings happening back-to-back. This means you will incur two sets of closing costs: one for the purchase from the motivated seller, and another for the sale to your end buyer. These costs include items like title insurance, escrow fees, recording fees, and attorney fees.

Even if the transactional lender covers the purchase price for the first leg, these associated closing costs are still your responsibility. They are typically paid out of pocket at the time of each closing. Factor in these double costs when you analyze your deal spread.

Methods for covering your transactional closing costs

Most investors fund these costs with cash they already have available. This might come from a business operating account or personal savings. Having readily accessible funds is key, as these costs can be due with little notice.

Another approach is to negotiate a seller credit on the first leg of the transaction. If the seller is highly motivated, he or she might agree to cover some of his or her own closing costs or even contribute to yours. This reduces your out-of-pocket expense.

Some investors use a line of credit for these purposes. This gives flexibility to cover unexpected fees. It is a good idea to have this set up in advance, so you are not scrambling at the last minute.

Finally, a private money lender might be willing to fund a small portion of closing costs as part of a larger, short-term loan, but this is less common for transactional funding specifically. Always clarify what a lender is willing to cover before assuming anything.

Why clear funds are crucial

Title companies and attorneys will require clear, verifiable funds for closing costs. This means the money needs to be in your account and available for wiring or certified check. Funds held in brokerage accounts or other illiquid assets usually will not work.

Delays in producing these funds can jeopardize your double close. Transactional funding is time-sensitive, so any holdup can cause the deal to fall apart. Always aim to have more than enough cash ready.

Consulting professionals for clarity

Every state and even county can have different closing customs and fee structures. It is wise to speak with a local real estate attorney or a title company representative early in your deal planning. They can provide an accurate estimate of what your closing costs will look like.

Remember, this information is for educational purposes only and is not legal, financial, or tax advice. Always consult with qualified professionals regarding your specific situation.

You can learn more about how different deal structures work by visiting /for/wholesalers. Understanding the intricacies of these deals can help you better prepare for all associated costs. New investors might find /for/new-investors helpful for foundational knowledge.

Knowing how to work a lead you just bought also helps in setting expectations around costs. See /how-to-work-your-leads for more information.