No security instrument on the A-B leg, just a demand note and paragraph 4 of the escrow instructions

Question

Going through a funder's doc package for a double close. A-B at $185k, B-C at $215k, flat fee $3,700, funds out and back the same day. The note is two pages, payable on demand that business day, and there is no mortgage or deed of trust anywhere in the package. What's supposed to protect the money is paragraph 4 of the escrow instructions: 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 theory being that I'm never really unsecured, because the deed doesn't record unless I'm paid.

Two things bother me. Recording practice varies by state and some underwriters want the A-B deed on record before the B-C deed goes on, so there is a window, short as it may be, where B owns the property and all I hold is paper against an LLC with almost nothing in it. And the personal guarantee in the package isn't notarized...

Has anyone made a funder's counsel add a deed of trust with a same-day reconveyance, and did the closing agent go along with it? Or do people give up on the lien and demand something else instead, like a collateral assignment of the B-C contract or an insured closing letter naming the funder?

dpatel_re · Answer

An assignment of the B-C contract and of the escrow proceeds does more for me 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 your closing, so you leave a lien in the chain that the C buyer's title agent then has to clear. What I actually underwrite is the closing agent: a closing protection letter from the underwriter naming my entity, wire instructions I verify by calling a number I looked up myself, and B-C funds cleared in the escrow account before a dollar of mine moves. Committed isn't collected.

aaron_fitz10 · Answer

Every closing agent I've asked says a same-day recorded lien and release pushes funding to the next morning.

chriswalton8 · Answer

What I can't get past is C's lender pulling out after the A-B deed records. Then you hold a $185k note, the house sits in B's name, and you never underwrote the house at all, only the fee. $3,700 doesn't come close to covering taking a property back and reselling it! Does anyone here size the A-B advance as though the resale just evaporates, or is the whole model that it can't?

No security instrument on the A-B leg, just a demand note and paragraph 4 of the escrow instructions

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