Private Money: transfer money to me or transfer money to title company?

Question

Greetings all,

I'm doing my first private money deal and need some advice.

I've located an investor who is willing to do a generic promissory note so I can purchase an investment property.

However, b/c the property I'm purchasing is a REO property, the bank requires proof of funds. I've submitted his bank account statement and a copy of our promissory note that we wish to sign at the closing table, but listing agent wasn't exactly enthused about the idea.

The reason I did it this is b/c I wanted my private money investor to know that I never have direct access to his capital and we're doing the transaction exactly like a bank closes a deal, where the borrower never has direct access to the money and the title company is the third party handling the transaction.

So... am I completely in the wrong here? Or is it customary in private money deals that the private money lender and I complete the promissory note prior to the closing table so the proof of funds is in my name?

Any advice is much appreciated.

- Matt

J Scott · Answer

As others have said, if you don't have discretion over the funds (in an account in your name), it's not a cash transaction... While you say the funds "are a lock," that's not true. What happens if your lender changes his mind? What if he decides you're not a good credit risk? What if a better deal comes along for him? What if his brother gets thrown in jail and he needs the money to bail him out? There are lots of reasons why a private lender may tell you that he'll fund the loan, but then ultimately not fund the loan. Until the paperwork is completed and the funds are wired, they are not "a lock." Now, if this is one of those rare situations where the funds really are "a lock," my suggestion would be to write the contract as a cash deal, offer earnest money for the full amount and then have your lender wire the funds into escrow until it closes. He may require you to pay interest for the extra time the funds are tied up, but since the funds in that case would truly be "a lock," it can be treated as a cash transaction, even if the cash is not your own. Otherwise, I would recommend writing a financed offer with no financing contingency and a large earnest money deposit (at least 10% and preferably 20%+). From a seller's perspective, this is as close to a cash deal as you can come, and they'll probably be fine with whatever proof of funds you have.

Jon Holdman · Answer

This statement is false. Its either a cash deal or its a financed deal. We know, from what you wrote, that this is actually a financed deal. So, you MUST write you offer saying its financed. Hard money or private money is not cash and you cannot use it to make cash offers. Its a common misconception. Buyer's think a private/hard money loan is equivalent to cash, so they write the offer saying its cash when its actually a financed offer. From the seller's perspective its always cash (unless they're carrying back a note, which doesn't apply in this case.) Its the fact the money is coming from a loan that makes this a financed offer rather than a cash offer. Write your offer saying its financed, include an approval letter from the lender, and (if it will help) info from the lender showing they have the money to make the loan.

Dion DePaoli · Answer

As an another way to skin the cat. You and your lender can create an escrow agreement between the two of you which lays out any stipulations to the funds released to fund the transaction or returned the lender which can include a release form from the lender. The lender can then safely fully fund the escrow and give the escrow agreement to the title company or closing attorney as your escrow agreement governs that escrow money. Then your proof of funds can simply come from the title agent which also would only show just enough money to close the deal and also gives a little impression that it is sitting there waiting for the bank to sell. A couple footnotes to this structure: 1 - remember you might have to release an initial deposit per purchase contract, so write that into the escrow contract 2 - this structure, typically without the formal contract is sometimes tried to be used by those with lesser integrity, the difference here is the contract. Your lender can make that escrow contract completely one sided and have you waive any right to the monies and waive any right to dispute the monies are yours. Another, thought, is if you are showing a loan, which you are and you put on the contract cash then your loan letter would need to state unconditional commitment. That still might be a stretch for the bank to believe or treat it like that but that is essentially the issue. Which is you do not have discretion of the funds, the lender does.

Account Closed · Answer

Great advice all. I see my error. Much appreciated.

Account Closed · Answer

@ Phillip, Excellent point. I think I see the issue. It's a cash transaction from me to the property owner, however, it's funded by a loan. The funds are a lock and we're already agreed upon the promissory note, we simply haven't executed the promissory note at this time. I was hoping to do this at the closing table where I sign the note, and then those funds are transferred to the property owner via the title company. (Note: this is my first time doing a private money deal, so there are almost certainly flaws in my thinking process.)

Account Closed · Answer

@ Jon, Yes, this would be 100% cash purchase deal using a private money lender. The deal is written up as me (the buyer) getting a loan via a private lender, so I do see where they might see that as a potential hang up. However, I submitted his bank statement in my proof of funds submission so they see he has 5x the amount necessary and our intention to sign a promissory note at the closing table. Apparently their initial hang up is that it's his name on the proof of funds, and not mine, even though we said it was a private lending deal. Therefore, I'm not sure if we should execute the promissory now and transfer money to my own account, or do it as I had originally intended at the closing table. I just think at the closing table seems more professional since I never have direct access to his capital.

Account Closed · Answer

@ Josh, When I said "this is how a bank closes a deal" I meant that funds exchange hands through the title company at the closing table, not about a bank submitting a proof of funds. But it's an all cash deal, where he has 5x more than the deal requires, but the listing agent (and bank) is supposedly hung up on the detail that it's his name on the bank statement rather than mine.

J Scott · Answer

Where does the 3 months come from? Who cares if the money has been in the account since 1957 or since two hours ago? If the funds are yours and they are available to be used to buy the property, it's a cash offer. I can't speak for others, but personally, I don't like having lots of cash sitting around being unused... I've never had anyone scrutinize how long funds have been in an account (other than underwriters for FHA loans), and I don't see why it would ever matter.

Loc R. · Answer

Jon, let me translate for you: "100% cash" or "all cash" means it is all YOUR money, and has been sitting in one of your accounts for 3 months.

Dion DePaoli · Answer

J Scott, I like where your head is at on the fully funded escrow but with the property being an REO that wouldn't be my first choice in case of escrow disputes from the seller's lack of performance. I would hate to have to inter plead escrow in order to get a lender's money released. Some more experienced folks might understand how to work the contract and better command performance on the deal, perhaps not so much on the OP (no offense Matt C, but your just green with newness). That is why I suggest a side escrow for the balance and only expose what is needed for contract escrow better to only have to inter plead 20% than 100%. I do agree and endorse the larger contract escrow offer of 10% or 20% to show your serious. As a side note, when I sell off REO and a cash offer comes in with a tiny escrow, that is the first think I mark up to see if they are just pulling my leg and don't have the cash. If you wanna pay cash my mindset is you have it right now. Tiny escrow offers are discouraging and certainly does not scream "I want this property" which is what you want a cash offer to say. Anyway, the risk and concept have now been pointed out none the less.