What Is Single-Source Funding?
REtipster does not provide tax, investment, or financial advice. Always seek the help of a licensed financial professional before taking action.
Single-Source Funding Explained
Transactional funding is not a new or complicated financing strategy. It has been used by businesses and investors for many years.
For a real estate investor who needs to take title to a property simply as a formality, for the purpose of getting it re-sold the same day to another buyer at a higher price, this creative financing strategy provides the short-term funds needed to make this in-between transaction happen.
In the United States, it has become an increasingly common way for real estate investors to fund double closings that occur back-to-back, on the same day.
Prior to the financial crisis of 2008, it was fairly common for real estate wholesalers to use the end-buyers purchase proceeds to fund both transactions in a double closing. This is often referred to as single-source funding.
With this closing maneuver, the end-buyer can sign their closing documents and submit their full payment for the property in the B-to-C transaction. The closing agent will hold these funds until the wholesaler has completed the closing with the original seller in the A-to-B transaction. When all closing documents are signed for both transactions, the closing agent would issue the sale proceeds to the wholesaler/seller in the B-to-C transaction, and the remaining funds could then be used to issue the sale proceeds to the original seller for the A-to-B transaction.
As part of this process, the end buyer needs to be aware and approve of their sale proceeds being used to fund both transactions. One example of this disclosure might look like this:
Simultaneous Close and Disbursement. Seller represents to Buyer that Seller has acquired title to the property pursuant to a pending sales contract with the Fee Owner and is simultaneously conveying title to the Buyer. Buyer authorizes Seller and Closing Agent to disburse closing funds toward the Seller’s purchase of the property.
By signing this kind of disclosure, the end buyer acknowledges their awareness of what’s happening with their purchase proceeds.
With the significant increase in lending regulations and oversight after the financial crisis of 2008, the seemingly “tricky” nature of single-source funding is less common today.
Double closings are still common, but instead of using single-source funding, it’s cleaner for the wholesaler to come up with their own cash to close the A-to-B transaction, rather than using the end buyer’s funds to cover both transactions.
Not every wholesaler has a large cash reserve available to buy properties outright, and that’s where transactional funding becomes very useful.