Funding the A leg out of the C buyer's wire, or insisting on separate money every time

Before the argument starts, can someone say plainly what "the money never leaves escrow" means? I picture the C buyer wiring 121k in, the closer paying the A seller 96k out of that same pot, and you walking with the difference. Is that the whole picture or am I missing a step where something actually gets lent?

@plumb that's the picture. One pot, two settlement statements, the second deal's money paying for the first.

My underwriter in my state won't insure it. I asked twice, got the same answer both times, and the closer told me she'd lose her agency agreement if she tried. So for me the question bramble is asking doesn't exist. I wire funder money for the A leg or I don't close. Fee has run about 1,250 flat on the deals I've done in that range, and I stopped resenting it around deal three.

Different world out here. The attorney who handles most of the closings in my county has done it out of one pot for years and doesn't blink. Small town, one underwriter relationship, everybody knows everybody. I'm not saying that makes it right, I'm saying bramble's answer is going to look completely different depending on whether you're closing in a county with four closing offices or forty.

Dumb question I'd rather ask here. In the one pot version, at the moment the A seller gets paid, who owns the house? Because it sounds like B owns it for about ninety seconds and never paid for it with anything of their own.

@compass B owns it for the length of the recording gap, whatever that is where you are, and that's exactly the thing people fight about.

On the money, my last four funded deals ran 1% with a 1,500 minimum. On a 96k A leg that's 1,500 against a spread that's often 8 to 12k. It's real but it isn't the thing that kills deals. What kills deals is the end buyer's lender needing something the timeline can't produce.

What is the funder actually protecting me from, in one sentence? If their money is out for six hours and the C funds are already sitting in escrow, I can't tell whether I'm buying insurance or buying a receipt.

Curious from the service side, does the closer charge more when there's separate funder money coming in? Extra wire, extra instructions, extra file. I'd assume yes and I'd assume nobody quotes it up front.

Isn't the one pot version just the end buyer lending money to the wholesaler without knowing it? Which sounds like it should be a usury problem, or at least something someone has to disclose. I may be way off here.

@marlow I've had end buyers get uncomfortable for exactly that reason even when it was all above board. One walked at the table when he worked out that his wire was paying the seller he'd never met. He didn't have a legal theory. He just didn't like it. That's a cost bramble should put on the scale too.

@anchor from the lending math, the flat fee is priced for a window measured in hours where the repayment source is already committed in escrow. That's the whole reason the fee is flat instead of an interest rate. What you're buying with separate money is that the first closing stands on its own funds, so if the second leg fails you have a lender with a lien and a conversation about an extension, rather than a title company holding a disbursement it can't justify.

The failure case is where the two versions separate. Confirm with your funder in writing what happens on the day the C buyer doesn't fund, because some term sheets convert to a short bridge at a stated rate and some just make the whole fee due plus costs.

Run it as expected value rather than as a principle and it gets easier to argue about.

Call the fee 1,500 on a 96k first leg. Call the probability the C leg dies after A to B records something like 2%, which is generous if your end buyer is cash and terrible if they're getting a loan. Call the cost of being stuck holding the house for 60 days while you resell it 6 to 9k in carry, funder extension and price concession. At 2% that's roughly 150 of expected cost against a 1,500 fee, so on pure expectation the one pot version wins if your closer will do it.

The assumption doing all the work there is the 2%. If your end buyers are financed, or if the underwriter can later refuse to insure the chain, the tail isn't 6 to 9k, it's the whole spread plus a title claim you can't clear. I pay the fee because I don't trust my own estimate of that tail.

Pull the actual funder documents before anyone votes. Both of the ones I've read carry a disbursement condition that says their funds close the A to B transaction and that no portion of the B to C proceeds may be applied to it. That clause exists because their underwriter wants a clean source of funds line on the first settlement statement.

Which means bramble's two options aren't really available at the same time on the same file. You pick one and the paperwork follows. And @marlow, nobody is lending anybody anything in the one pot version. There's no note, no interest, no term. It's a disbursement timing question inside one escrow account, and whether it's allowed comes down to state law and the title underwriter's rules, which differ.

@beacon yes, in my experience quoting coordination work, the extra wire and the second set of instructions shows up as a higher closing fee on the B side, usually a few hundred. Nobody volunteers it.

Does the A seller get told either way? I'd want to know what my own closing statement was showing if I were them.

So does the funder record a mortgage for the six hours or not? I've been reading about notes for a month and I still can't picture a lien that exists and gets released inside the same afternoon.

@vellum some do, some don't, and it varies by state and by funder. I called three underwriters last year for exactly this and got three different answers about whether they'd insure the one pot structure, which told me more about the question than any of the answers did.

The part people underrate is the recording gap. In some states the two deeds go on record minutes apart and in others there's a real window, and during that window your name is on title with no lender of record and no funds of your own in the deal. Ask your closer what the actual gap looks like in that county before you decide anything.

The document test I'd apply is simple. Look at the first settlement statement and read the line that says where the buyer's funds came from. If that line names a lender, you have a fundable first leg. If it names nothing, or it names the second transaction, you have a first leg that only exists because the second one did.

@wren the A seller sees their own statement, which shows what they're being paid. It doesn't usually show your resale price. Disclosure requirements about the resale differ by state and a few states require more than others, so that's one to confirm with a closing attorney where you're operating.

I have money and no deals, so the funder side looks like the better seat to me. Flat fee, hours of exposure, repayment already sitting in the account. What am I not seeing, other than that the whole thing lives or dies on wholesaling volume in states that keep squeezing assignments?

@tender that helped. So what I was really asking was what happens on the bad day, and the answer is the two structures give you different counterparties on the bad day. One gives you a lender to renegotiate with and one gives you a title company with a hole in its file.

What does the extension actually cost when it happens? Is it another flat fee or does it turn into daily interest?

@anchor every sheet I've read handles it differently. Two converted to a rate in the mid teens with a minimum thirty days, one charged a second full flat fee, one just said the loan matures at 5pm and left the consequences to the default section. Get it in writing before you need it, because you won't be negotiating well at 4:40.

Coming at this from job sites, the one pot version is paying the framer out of the money the homeowner hasn't released yet. Works fine right up until the draw doesn't come, and then you find out whose problem it was all along.

Live on this right now. Closer offered the one pot version on Thursday, funder's instructions forbid it, and I'm the one who has to tell one of them no by tomorrow morning. Voting for separate money because the funder's clause is the one with teeth.

1,500 to not have to think about this again seems cheap for something you'll do more than once.

@sextant your expected value framing is right on the arithmetic and I think it undercounts one item. The tail isn't only the carry cost of holding the house. If the underwriter later takes the position it shouldn't have insured that first deed, the exposure follows the property into the next sale and shows up as a claim, and how that gets resolved depends on state law and the policy terms. You can't price that with a 2% and a carry number.

@meridian the thing you're not seeing is what the funder does when the wire doesn't arrive. Their capital is fine on the average day. Their operations have to be good at the exception, and that's a staffing problem, not a math problem.

"Decide deal by deal" is going to win this poll and I think it's the weakest answer. Per deal decisions get made under pressure by the version of you who wants the deal to close. Pick the rule while you're calm, which is what bramble is doing, and then the only judgment call left is which closer you use.

Writing down what I'm taking out of this since I'm still deals-zero. Ask the underwriter, not the closer, whether the one pot structure gets insured in that county. Ask the funder what their disbursement clause says about the second leg's proceeds. Ask what the recording gap looks like where I'd be closing.

@cairn's point landed. I'm voting for separate money every time even though @sextant's math says the fee is expensive relative to the expected loss, because I don't have enough deals under me to have a real opinion about the tail.