I funded the first leg and the end buyer's wire never came. I owned the house for five months.

First and last time I played transactional lender without checking the far end of the chain.

Deal came to me from a wholesaler I'd done nothing with before, referred by someone I trust, which is how most of these start. A-B at 148k, B-C at 179k, cash end buyer, both closings on the same Thursday. My fee was 3,500 plus a point, secured by a deed of trust and a personal guarantee, funds wired to the closing agent with instructions that my payoff came out of the second leg.

The first closing ran at 1pm. The second was set for 3. At 3:40 the end buyer's agent said the wire had been initiated. It had not been initiated. By Monday the buyer was not answering, and the reason turned out to be that his own funding source had pulled out the previous week and nobody told anyone, on the theory that he'd find a replacement by Thursday.

So I was the owner of a 1,150 square foot three bedroom in an older working class suburb, bought at 148k, sight unseen, because I had underwritten a six hour loan instead of a house.

What it cost:

Paid 148k plus 3,900 in closing costs.
Roof was at the end of its life and there was a water stain in the hall ceiling I'd have found in ten minutes with a flashlight.
Vacancy insurance, utilities, lawn, five months, about 4,300.
9,200 of repairs to get it listable, and I did the cheap version.
Sold at 139k. Commissions and seller costs took another 9,700.

All in I'm down about 26,000 against a fee that would have been 5,000. The personal guarantee was worth exactly what the guarantor's balance sheet was worth, which was nothing I could collect on without spending more than I'd recover.

What I'd do differently, plainly: I will not release funds into the A-B leg until the end buyer's money is sitting in escrow at the same closing agent and I have written confirmation of it from that agent. And I will underwrite the property as though I'm buying it, because on the bad day I am the buyer.

4 replies

1laurenkim53Passive

The line about underwriting a six hour loan instead of a house is the whole lesson. I look at low price point rural stuff and the gap between 148 and what that house is actually worth in a hurry can be enormous, especially where there are four buyers total in a county.

Did the wholesaler stay in touch or vanish?

3mikeoconnell7SP2APRO6

Sorry, that's a rough one. The part that would haunt me is that the buyer's funding had already collapsed the week before and the information just sat there. Nobody in that chain had a reason to tell you and nobody had a duty to either.

1brandonlee36Passive

I'd push back slightly on where you've put the cause. Yes, escrow verification would have stopped this deal. But you took on 148k of exposure on a referral, on a property you hadn't seen, with a guarantee you hadn't checked. Any one of those three habits would have caught it, and the escrow rule only fixes the specific version of the failure you happened to meet.

The 9,200 of repairs is the number I'd stare at, by the way. On a five month hold of a house you didn't choose, cheap repairs and a 139k sale is a reasonable exit. That part you handled fine.

0angela_burkeServicePRO6

@thicket is right that the guarantee is the soft spot. We ask for two years of returns and a personal financial statement before we'll take a PG seriously, and about half the operators go silent at that point, which is itself the answer.

@meridian one addition to your rule. Get the end buyer's proof of funds directly from the end buyer's bank or their closing agent, never routed through the wholesaler. Screenshots get edited and email forwards get forged, and the person with the most incentive to keep the deal alive should not be the one carrying the evidence.

I funded the first leg and the end buyer's wire never came. I owned the house for five months.

4 replies