There are a lot of aspects of my job as a real estate attorney that I did not learn in law school. I don’t mean that I failed to comprehend or understand legal concepts that professors tried to teach to me – though yes, that happened – but that a lot of what I practice now with REO closings simply was not a part of the law school curriculum.
It’s like a dentist learning in dental school what causes cavities, and then 10 years later in private practice having to figure out how to remove the decay and fill a cavity.
For example, law school did not teach me how to track files, create reports or analyze our business practices. Perhaps I also should have gotten an MBA. But as our office tracks our closing volume, one variable that has changed a good bit over the past year is the increase in purchasers obtaining private loans as opposed to institutional loans.
For years, we typically saw that REO purchasers obtained financing in about 66% of our closings. That percentage decreased over the last few years, as more buyers purchased properties with cash. Of the financed purchases, a significant majority obtained traditional loans, or institutional loans. These would be loans from name-brand lenders or banks, whether or not insured by a GSE.
We saw private lending, also called hard-money loans, but at a small percentage of our financed closing population. Typically private lending was reserved for high-risk borrowers, high-risk properties, alternative loan programs, or renovation loans.
But over the past year, we have seen more and more examples of REO purchasers obtaining private financing. In theory, this should not affect REO sellers, but we see that this type of financing can impact closings. Even if this is just anecdotal evidence, here are some items that can delay funding for REO sellers to be aware of when accepting contract offers from purchasers relying on private lending:
1) At times private lending can be more nimble, less reliant on customary underwriting practices. Which surely is one of their selling points, but also, private lending can be a bit unreliable. There might be odd requests that are required for funding, or perhaps their funding contact is inaccessible due to simply not being in their office. Instead of a “funding department,” there might be one person responsible for funding, who just might not be available. This in turn would delay the process to tender the seller their proceeds;
2) Some states, such as in Georgia where I live, require “table funding” or “wet funding.” That means all the funds are due at or before the time of closing, not afterward. But frequently with private lending, funds are held back and delivered after closing when the lender is satisfied their requests have been met and the loan documents signed. This doesn’t stop proceeds from going to a seller, but again can be a cause for delay;
3) To fund the loan, many private lenders require that the entire loan package be scanned, emailed and reviewed by their office prior to them providing the loan proceeds or funding approval. This process delays the completion of the closing, which of course can be delayed further if the lender is not available or accessible when the documents are provided. We just complete the 2024 holiday season, and at times it seemed that private lenders’ offices were closed for more days than traditional lenders. This is another cause that delays seller’s proceeds;
4) Funding traditional loans requires settlement offices to comply with lender instructions, but instructions from private lenders are more extensive than traditional lenders. The end result is more time spent towards getting funding, and a longer process to tender seller’s proceeds;
5) Related to this, whereas traditional lenders require copies of the title commitment, private lenders more often require a marked-up title commitment. A marked-up title commitment is exactly as it sounds, the title agent manually “marking” the title commitment to reflect that the lender is insured. This also can be a time-consuming task, especially with those closings where title is handled by a national title company instead of our law firm; and
6) While traditional lenders may have a treasury or wire department, and therefore are able to send wire transfers up until their bank’s wire cut-off time, private lenders seem to have wire cut-off times that are much earlier in the day. Unless they wire the loan proceeds prior to closing, there can be a delay with receiving the funds, and then in turn, to provide the Seller with their proceeds.
Our goal is to close transactions and pay seller’s proceeds as quickly as possible. The above list doesn’t describe the worst horror stories coming out of closings, but does help explain delays in completing closings and sending sellers their proceeds. There are many factors that go into a seller choosing which buyer and contract to accept, and hopefully this has helped peel the curtain back to reveal why funding might be delayed.