No security instrument on the A to B leg, just a demand note and a paragraph in the escrow instructions

Question

Reviewing a funder's document package for a double close is worth doing carefully, because the structure often relies entirely on timing rather than a recorded lien. Take an A-B leg at 185,000 and a B-C leg at 215,000, a flat funding fee of 3,700, with funds out and back the same day. The note is typically two pages, payable on demand that business day, and there is often no mortgage or deed of trust anywhere in the package. What is meant to protect the funder's money instead is a paragraph in the escrow instructions, commonly something like: the title agent may release the A-B deed for recording only upon receipt of B-C proceeds sufficient to repay the note in full. The reasoning is that the funder is never truly unsecured, because the deed does not record unless the note is repaid. Two things are worth pressure testing in a structure like this. Recording practice varies by state, and some underwriters want the A-B deed recorded before the B-C deed goes on, which creates a window, however brief, where the B party owns the property and the funder holds only paper against an LLC that may have little in it. And a personal guarantee that is not notarized is worth less than one that is, in the event enforcement is ever needed. Funders who want more protection than a timing mechanism have gotten counsel to add a deed of trust with a same day reconveyance built in, when a closing agent is willing to structure it that way. Where that is not available, a collateral assignment of the B-C contract or an insured closing letter naming the funder as a protected party are reasonable alternatives to demanding a lien that the deal's speed was never built to accommodate.

dpatel_re · Answer

An assignment of the B-C contract and of the escrow proceeds does more than a deed of trust that gets reconveyed the same afternoon. Recording plus release runs somewhere around $60 to $150 depending on the county, and in some states the reconveyance sits inside a statutory window longer than the closing itself, leaving a lien in the chain that the C buyer's title agent then has to clear. What deserves underwriting is the closing agent: a closing protection letter from the underwriter naming the entity, wire instructions verified by calling a number looked up independently, and B-C funds cleared in the escrow account before a dollar moves. Committed isn't collected.

aaron_fitz10 · Answer

Most closing agents will say a same-day recorded lien and release pushes funding to the next morning, which is exactly the friction this structure is trying to avoid.

chriswalton8 · Answer

What is hard to get past is C's lender pulling out after the A-B deed records. At that point the funder holds a note secured by nothing but paragraph 4, the house sits in B's name, and the underlying property was never underwritten at all, only the fee. A flat fee in the thousands does not come close to covering taking a property back and reselling it. The real question is whether the A-B advance is sized as though the resale could evaporate, or whether the entire model assumes it cannot.

No security instrument on the A to B leg, just a demand note and a paragraph in the escrow instructions

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