Two funder term sheets, same fee, completely different failure clause

I've got two transactional funding quotes on a double close scheduled for next Thursday and I can't separate them on price, so I'm trying to separate them on what happens when it breaks.

Deal: buy at 96,000, resell at 128,500 to a buyer paying cash from a self-directed account. Both funders quote 2,500 flat on the 96,000, repaid out of the second closing the same day.

Funder A: fee is fully earned at wire, and if the resale doesn't fund by close of the funding day, the advance converts to a 30 day loan at a rate they'd quote at that point. They record a mortgage in their name and release it after payoff.

Funder B: cheaper on paper by 200 because they don't record anything. They fund into escrow against the closer's instructions and the money never leaves escrow if the second leg doesn't fund. But their agreement has a same-day-or-unwind provision that says the closer returns the advance and the first closing is rescinded, and I have no idea how a rescinded closing works once a deed has been signed and possibly recorded, which I'm told depends on the state and the county's recording practice.

So A gives me a defined bad outcome that costs money. B gives me an undefined bad outcome that might cost nothing or might cost a title claim.

My cash buyer is real, I've seen the account statement, and the funds are with a custodian who takes two business days to move money, which is the part that keeps me up. If the custodian misses Thursday, A turns into a loan and B turns into a legal question.

I'm leaning A purely because I can price it. Talk me out of it.

4 replies

1tashaford30PB2APRO7

The custodian timeline is the whole deal and you've put it in the last paragraph. Two business days to move money means the money needs to be requested Monday for a Thursday close, and self-directed custodians are famous for a document review step nobody mentions until it's late.

I'd get the custodian to confirm the funding date in writing, and I'd ask them what document triggers the release. If it's the settlement statement and the settlement statement can't exist until the first leg closes, you have a circular problem that no funder clause solves.

2kevin_lombardPG1BPRO5

I've gone over this a couple of times and B still doesn't sit right with me. If nothing gets recorded and the money sits in escrow, in what sense did the first closing happen? Is the deed just held? That seems like the answer to your question but I don't know enough to say it confidently.

3angela_burkeServicePRO6

@juniper that's closer than you think. In practice the closer holds the signed deed and records only when they can record both, which is why the order and timing of recording matters so much and why it differs by state and sometimes by county. Whether a signed but unrecorded deed leaves you with an obligation is a question for an attorney where the property sits.

@ember I'd pick A too, and not for the reason you gave. A recorded mortgage and a defined 30 day fallback means the funder has thought about the bad day and priced it. B's paper reads like it was written for deals that always work. The 200 is noise.

1ryanmck27SC2C

Ask A what the 30 day rate would be, today, in writing, before Thursday. "We'd quote it at that point" is the clause I'd want closed. You're buying a defined outcome, so make them define it.

Two funder term sheets, same fee, completely different failure clause

4 replies