Since the real estate bubble burst and lenders tightened their policies, investors and wholesalers dealing with motivated sellers of distressed properties have turned to transactional funding for closing deals. This type of funding is useful when the aim is to swiftly resell the property to the end buyer right after purchase. If you’re exploring transactional funding in real estate wholesaling and seeking answers, we have the essential questions and answers.
1. What Is Transactional Funding?
It’s a kind of real estate loan that enables you to purchase and sell property using the same source of funding. Usually, the borrower must repay the entire amount within a specified short period, making it a shorter-term option than other real estate loans. Transactional financing is beneficial when you require funds promptly but prefer not to sell your current home or take on long-term debt, such as an investment property mortgage, to obtain the money you need.
2. Who Can Benefit from Transactional Funding?
Transactional funding is particularly advantageous for wholesalers who prefer not to invest their funds. While it can be applied to various business transactions, it is predominantly utilized by flippers and experienced real estate professionals to streamline deals. Transactional funding can be effectively employed in the following scenarios:
- Double escrow
- Bank sale or short sale
- Auction real estate
- Contract assignment
- Earnest money deposit
- Flipping any type of real estate
3. How to Get Approved for Transactional Funding in Wholesale Real Estate
Getting transactional funding for wholesale real estate is a quick process, usually taking just a few days for approval, and the funds are used for only one to two days. You don’t need any proof of funds for real estate to qualify.
Here are the main requirements:
- Find a property and secure agreements with the seller and the buyer, who should be ready to proceed.
- Provide documentation proving that you have secured the property from the seller.
- Have a cash buyer ready to purchase the property from you or a buyer with financing.
4. How Does the Expense of Transactional Funding Stack Up Against Traditional Loans and Private Funding?
Transactional funding is generally more cost-effective than traditional loans when borrowing money for a real estate deal. Why? With transactional funding, there’s no interest to be paid on the loan, and the transactional lender doesn’t earn any interest either.
However, private investors often impose higher interest rates than banks because that’s how they maximize their profits. So, if you opt for private funds instead of transactional funding, anticipate that your mortgage payments and investment expenses will likely be higher than traditional financing options.
5. What Tax Consequences Does a Real Estate Wholesaler Face When Utilizing Transactional Funding?
The tax considerations tied to transactional funding are straightforward for real estate wholesalers. If you keep a property acquired with a hard money lender and later sell it for a profit, you’ll be liable for capital gains taxes. However, if a house bought with a private lender ends up in foreclosure without being sold or refinanced before foreclosure, the IRS categorizes it as an ordinary loss, exempting it from capital gains taxes.
Are You a Real Estate Wholesaler on the Hunt for Transactional Funding?
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