Real estate wholesaling can seem like a goldmine, but sometimes, you hit a snag. You have got a property lined up and a buyer ready, but the earnest money deposit is holding you back. This is where transactional funding earnest money deposit comes into play, acting as a bridge in your deal.
It can be a confusing element. Many people think it is part of the overall financing, however it has it’s specific use in the wholesaling business, making understanding transactional funding earnest money deposit essential for closing deals smoothly.
Table of Contents:
- Understanding Transactional Funding
- Why You Might Need an Earnest Money Deposit (EMD)
- How Transactional Funding for Earnest Money Deposits Works
- Cost Analysis of EMD Funding
- Transactional Funding and Real Estate Market Trends
- Legal Aspects of Transactional Funding Earnest Money Deposits
- Best Practices for Using Transactional Funding Earnest Money Deposits
- FAQs about transactional funding earnest money deposit
- Conclusion
Understanding Transactional Funding
Transactional funding is short-term financing. It lets investors buy and quickly resell properties, usually in days.
It is useful in double closings. The investor doesn’t hold onto the property long or sometimes ever.
What is a Double Closing?
A double closing involves two transactions. The wholesaler buys from the seller and then immediately sells to the end buyer.
Transactional funding makes these deals possible. It covers the cost of the initial purchase for this type of situation.
Why You Might Need an Earnest Money Deposit (EMD)
An earnest money deposit shows the seller you’re serious. It’s a portion of the purchase price, held in an escrow account, showcasing your good faith in moving the deal forward.
This deposit assures the seller. According to Stash Geleszinski of Capstone, “It’s part of every real estate transaction”.
The Role of EMD in Transactional Funding
In a typical real estate deal, a large earnest money deposit is used to help prove an offer is a legitimate. A buyer can separate themselves from the competition. “In a seller’s market, larger earnest money deposits can be necessary to compete with other buyers,” reports SmartAsset.
It holds you, as a buyer, accountable. So if the buyer flakes without just reason, the seller can collect your earnest money as a way of protecting them.
How Transactional Funding for Earnest Money Deposits Works
Sometimes, as a wholesaler, you don’t want to use your own funds for an EMD. Maybe the deal will move slower and lock up your available cash?
Several companies offer earnest money deposit loans specifically for these cases. Lenders that fund double closings, usually won’t always fund an earnest money deposit.
You must do your own diligence, but borrowing money can be easier for some buyers to use in place of their personal funds.
The Process
First, find a deal. Secure a purchase agreement with the seller, where there’s enough “meat on the bone”.
Then, you can get pre-approved by your lender. They may be giving you 100% of your transactional funding, but sometimes you may require a EMD loan also.
Some may not be able to put out an EMD deposit to a seller, so you could agree to an agreement, after the inspection period.
Cost Analysis of EMD Funding
There are several real estate investors that put on an EMD. EMD funding helps provide the resources, so you don’t have to tie up your own funds.
It’s worth understanding the pricing though. Below is an outline for common situations you might run across when seeking funding support.
Here’s how FundMyDoubleClose.com prices their EMD loans:
| EMD Amount | Fee |
|---|---|
| Up to $5,000 | $1,500 |
| $5,001 – $15,000 | $2,500 |
| $15,001 – $25,000 | $5,000 |
| $25,001 – $50,000 | $12,500 |
| $50,001 – $75,000 | $20,000 |
| $75,001 – $100,000 | $27,500 |
A 10% upfront deposit is needed. However, this is credited if the deal proceeds, functioning as part of your payment towards the fees.
Transactional Funding and Real Estate Market Trends
The commercial real estate market is changing. Traditional office spaces are facing challenges, but others are thriving.
Industrial spaces and data centers continue strong, while multifamily housing anticipates improvement. New sectors like film studios and even parking lots are seeing interest according to Neighbor.com.
Adapting to the Market
Knowing current trends is key. It will affect where a buyer and seller should focus their time.
It’s crucial you are on top of things as an investor. Using resources, and adjusting with these dynamics can affect deals done.
Legal Aspects of Transactional Funding Earnest Money Deposits
Real estate has its share of legal rules. You want to consider many things.
State laws change. A trusted source for guidance on these varying laws is the National Association of Realtors.
Handling Disputes
Disagreements might arise in the process. Your legal agreements will play a big role.
You want everything clear and up front when moving forward to reduce issues. You could look for advice from companies like LegalZoom.
They specialize in guidance in various steps along the process.
Best Practices for Using Transactional Funding Earnest Money Deposits
Set yourself for a smoother process, using EMD deposits and transactional funding.
- Document everything well to help with all parties communicating clearly with one another.
- Confirm all your contingencies. Do not release your EMD, unless it has completed, or if you’re ok with loss.
- Remember you can reach out for a 1-1 consult, or review content on platforms to learn more, or connect in online communities and forums, along with real estate events for clarity from experts, when questions arrive.
FAQs about transactional funding earnest money deposit
How is earnest money disbursed at funding?
Earnest money is usually held in an escrow account. It’s managed by a neutral third party, such as a title company or attorney.
At funding, this money is applied towards the buyer’s down payment or closing costs. If the deal doesn’t close, the earnest money may be forfeited to the seller, depending on the terms of the purchase contract.
What is transactional funding in real estate?
Transactional funding is a short-term loan. It’s used by real estate wholesalers to purchase a property and quickly resell it, often within the same day or a few days.
This type of funding is designed for double closings, where the real estate investor buys and sells the property in quick succession. No credit checks are typically required for this kind of short-term financing.
What does it mean when a real estate transaction is funded?
When a transaction is “funded,” this means the money required to complete the purchase has been made available. Usually through the final buyer’s funds clearing in the case of double closings.
This typically involves a wire transfer of funds to the closing agent or title company. The closing agent then disburses the funds according to the closing instructions.
What is the earnest money in a transaction?
Earnest money is a deposit made by a buyer. The purpose is to show commitment to purchasing a property.
It helps demonstrate “good faith.” The amount can vary, but it’s often 1-3% of the purchase price.
In some hot markets, it could be higher. This good faith deposit is usually held in an escrow account until the closing.
Conclusion
You might now have some greater clarity on the role transactional funding and earnest money deposits play in real estate investing. Hopefully your questions were addressed, so it won’t hold back your ability to close more deals for your real estate investing portfolio.
Understanding your tools and risks allows investors and other agents involved in the property purchase with their funding process. Getting that purchase contract across the line helps put together the entire process with transactional lending.
Use a good faith deposit when needed for your double close deals, and use Fund My Double Close support team for assistance, by working with a proven money lender. Remember that specific rules can vary by location, like South Carolina, North Carolina, South Dakota, North Dakota and in areas such as Des Moines.
At FundMyDoubleClose.com, we specialize in transactional lending solutions tailored for real estate investors and wholesalers. Whether you're interested in double closings, earnest money deposit (EMD) loans, or seller carry transactions, our team is here to assist you.
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