Do You Pre-Fund Before Finding a Deal?

Question

Some investors line up funding first; others contract the deal and then secure financing. What’s your preferred approach and why?

Leona Du · Answer

You can definitely find the deal first and sort out the funding after. A lot of investors do that and use earnest money deposit financing to help bridge that early gap. It lets them secure the contract without locking up all their cash, which keeps things more flexible while they finalize the rest of the financing.

Benjamin Aaker · Answer

Nope, you can try to get a feel for general interest but it usually doesn't work to get commitments before the deal is under contract. If not, what are your investors actually agreeing to? They way they do it is by having a fund, where investors don't get to see the deal prior to the purchase.

Remington Lyman · Answer

It depends on what type of deal you are working on and what type of financing you are looking to get

Frankie Vozzi · Answer

Hey Michael, It really comes down to your strategy and comfort level. Some investors prefer to line up funding first because it gives them a clear budget and a competitive edge when negotiating. On the flip side, others like to secure the property first and then finalize financing to ensure the deal is exactly what they want. At Branch Lending, we’re flexible and can move quickly either way. It’s all about what gives you the confidence and edge in your market. Let me know if you’d like to chat more about what works best for you!

Jimmy Lieu · Answer

Hey Michael, I’ve always found it way less stressful to have funding lined up first, especially as an investor who does a lot of deals in Columbus Ohio. Having your lender ready to go lets you move fast and write stronger offers, which matters a lot in competitive markets. But on the flip side, if you really know your numbers and trust your lender’s ability to close quickly, putting a good deal under contract first can work too, especially if it’s something you know is a no-brainer. In Columbus the macroeconomics are on fire with all the population and job growth plus huge companies like Intel, Amazon, Google, Facebook, Microsoft, Honda, LG, and Anduril coming in, so good deals don’t sit for long. Because of that, I usually prefer to have financing mostly dialed in so I can jump on properties in that 120–180k range that hit the 1% rule and cash flow right away. Happy to connect and answer any questions you have!

Juan Yepes · Answer

Usually pre-funding will be structured as a fund. It's a way for GPs to secure equity and close quickly when a deal comes up. Also a way to charge fees for assets under management even when funds are not being used.

In my opinion, contractual funding commitments contingent to target returns are better for both parties. For example an LP entering into a commitment to provide $10M in equity, deployed through capital calls as deals meet established return criteria (duration, IRR, EM, etc.). The LP only provides funds when they are ready to be deployed and GP still secures strong financing commitment ahead of funding the deal.

LPs don't have capital sitting in a fund unused, LPs only get charged management fees when funds are actively being used, GP has equity commitments that they can tap into quickly.

Greg Scott · Answer

As a real estate investor, I always want to be able to underwrite the property.  This is why I have never invested in a real estate fund, nor would I ever give money to someone who is looking for a deal.

I have friends that invested in a pre-funded deal.  After a year, the sponsor couldn't find anything so he refunded everyone 80% of their money.  The 20% was used up on attorney fees, travel to look for deals, and other related costs.

What would be worse than that is if the sponsor feels pressure to buy and put the money to use.  In those cases you are likely to end up with much less than 80% of your money back.

Do You Pre-Fund Before Finding a Deal?

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