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Is Transaction Funding Legal, and Pitfalls You Need to Know

By Duncan Wierman

Republish: EasyPublish™ Published: 04Oct2009 Word count: 696 Viewed: 317 time(s) Get Free Content For Your Site

In the past, one of the easiest ways of getting a check from real estate investing is through the use of simultaneous closings. This was were essentially buying a property and reselling it to another investor on the same day. Because of new state and federal policies which have made simultaneous transactions much more difficult, a program called transaction funding has taken the place to allow people to continue making money without the hassle of being subjected to scrutiny and red tape of regulations.

Questions

One of the questions that many people ask when faced with the opportunity of simultaneous closings, however, is whether transaction funding is legal, and what pitfalls are faced with these types of investments. Before you engage in any type of activity, especially those that involve money even if the money is not yours per se, it is important to understand the full legal implications before undergoing the process, in order to ensure your safety and reputation.

Legalities

One of the things that an investor must understand in these types of transactions, however, is that it is actually legal. Although there have been new requirements and procedures that the state and the federal bureaus conduct to make the transactions much more difficult than in the past, these essentially are only safety mechanisms that should not deter entrepreneurs such as you from making money and profit when faced with the opportunity. The only catch is that you cannot undertake simultaneous closings without a funding source, which makes transaction funding necessary - so that you do not undertake dry closings per se, which are essentially the bad types of deals to avoid. When you are able to show proof of funds during the transaction between buying and selling, then you have little to worry about, unless your prospective buyer walks out on you. But then again, it is your job to ensure that you have a buyer who will follow through with the deal.

Pitfalls

The other pressing question that is often asked is what the catch is behind these types of deals. Naturally, when faced with something that seems too good to be true, the initial reaction for most people is to think that it probably is. When it comes to transaction funding to be used to facilitate simultaneous closings, there are several things that you should be aware of. First is that there is no such thing as a free lunch.

Since transaction funding essentially provides you with a bridge loan to allow you to undertake a particular buy and sell transaction, you as an investor should be prepared to pay the fees that come with all types of loans. In most transaction funding programs and companies, there are commitment fees to be paid, usually along the line of $500. These vary from one company to the other, where some require annual commitment fees for people who make a living out of real estate buying and selling, while others offer commitment fees that last a lifetime.

Apart from the commitment fees, however, there are the actual fees for the particular loans themselves, depending on the amount requested. Most companies, for instance, will charge a flat fee of around $2,000 for funding requests of up to $100,000. Keep in mind, however, that as the funding request increases, the loan fees also increases. Depending on the transaction funding company, you can borrow up to several million dollars, especially for investors who are dealing with bulk REOs and other major real estate investments that require larger capitals. It is up to you to decide what type of real estate business you will undertake.

The other major pitfall that you should know, however, is that tax does apply to these types of transactions, since real estate that is bought and sold within 12 months is considered to be regular income and therefore subject to the usual taxation rules. Because of this, expect your earnings to be reduced by anywhere from 40% to 50% depending on the particular taxes that apply to your particular area. With a good property that can sell at an excellent price, however, both loan fees and tax deductions can still end up with a quick buck for you.

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