Funding a first closing for six hours. What am I actually holding?

I lend, I don't own, and this is the first time anyone has asked me for money that comes back the same day. Trying to understand it before I say yes.

The deal as described to me: he has a house under contract at 137k. He has a buyer at 168k who is paying cash. Both closings are set at the same title company on the same afternoon, seller to him first, then him to the buyer about an hour later. He needs 137k plus about 3,400 of closing costs for that hour. He's offering 2,750 flat plus one point, so about 4,120 for what is, on paper, an afternoon.

My questions are basic and I'd rather ask them here than look confused on the phone.

What am I secured by? If it's a mortgage or deed of trust recorded against a property he owns for one hour, does that even record in time to matter?
Whose name is on the note, his LLC or him personally, and do I want a personal guarantee.
If the cash buyer's wire doesn't show up, I own the problem. What does that actually look like the next morning.
He mentioned something called a dry close where the buyer's money funds both legs and he doesn't need me at all. If that exists, why is he calling me?

He wants an answer by Friday. I'm not in a hurry to earn 4,120 badly.

Answer

1joe_delgado5AP4CPRO6

I've been on the borrower side of a dozen of these so I'll take them in order.

Yes, you get a mortgage or deed of trust, and yes it gets recorded, but recording practice and timing vary a lot by state and county, and in a same day double close the paperwork often records after the fact in sequence. Your real protection is the closing agent's instructions, not the recorder's clock. You wire to the title company or attorney, not to him, and the instructions say your funds are only released into the A-B closing and your payoff comes out of the B-C proceeds before he sees a dollar. Get that in writing signed by the closing agent.
Both, if you want to be able to collect. LLC on the note, personal guarantee attached. Every funder I've used required it.
It looks like you owning a house you never underwrote, at 137k, with no idea what the roof is like. That is the whole risk. Which means you underwrite the house as if you're buying it, because on a bad day you are.
Because a dry close needs the end buyer's funds to sit in escrow and cover both legs at once, and plenty of closing agents in plenty of states won't do it, or the buyer's lender won't allow their money used that way. He's calling you because someone said no.

6 replies

2devon_pierce Get yoursPRO5

The 4,120 on 137k for one day looks enormous until you notice you're pricing the possibility of owning the house, not the hours. Once you look at it that way it's not obviously generous.

2raj_mehta14CapitalPRO6

Is it even a note in the normal sense if it's paid the same day? I've been reading about notes and paper and everything I've seen assumes months of payments. This sounds more like an escrow arrangement with a fee attached, though @flint's answer suggests there's a real recorded lien behind it.

3bmoreno23AB1B

@flint's answer to question 4 is the first time dry close has made sense to me. So the end buyer's cash sits in escrow, and the title company uses it to pay the seller on the first closing, and the wholesaler never brings money. If that works, the whole transactional funding industry only exists because closing agents refuse to do it?

1luis_carrera Get yours

I'd add one item to your list. Ask him what happens if the seller's payoff comes back wrong, an undisclosed second lien or a judgment nobody found. That delays the A-B leg past the B-C leg and your money is already committed. Ask to see the title commitment before you wire, not after.

@ember it's more that some agents won't and some states' good funds rules make it awkward. Not one single reason.

2gregpowell66AG4BPRO8

On number 3, do the walkthrough. I've been in enough houses at that price to tell you 137k buys you very different buildings depending on what the mechanicals look like, and if the wire fails you'll want to already know whether you're sitting on a 150k house or a 105k house. Half a day of your time against 137k of exposure.