Mitigating Risks to Prevent Funding Delays
Reach the Finish Line with Minimal Stress
By Chris Branchetti
In the fast-paced world of real estate transactions, time is of vital importance. Private Lenders are in demand for quick and reliable funding to support investor deals nationwide.
Investors require cash for a fix and flip or for rolling proceeds from the first A-to-B transaction to the second B-to-C transaction. Delays in disbursing escrow can have a significant impact on the success of the deal, affecting private lenders and investors’ overall deal flow. Delays with funding escrow can have severe financial ramifications for all parties involved. Investors relying on timely financing may suffer penalties, and interest charges, or even lose out on their desired properties due to the failure to secure funds within the agreed-upon timeline. Such financial setbacks can have a substantial impact on the profitability and success of the transaction.
As a stakeholder in the transaction, it is crucial to understand the requirements and challenges in disbursing escrow, such as title issues, good funds, late day closings, incomplete/missing documentation, and title insurance coverage. There are several key areas that can address any issues proactively through due diligence review, communication of important milestones, steps taken for wire fraud prevention, receiving lender approval to fund, and vetting out the title company for approval.
Understanding the Challenge
Complex Title Issues: // Title issues, such as liens, encumbrances, or competing claims, can complicate the escrow process. Conducting a thorough title search and resolving any outstanding title issues before closing is vital to prevent delays.
Good Funds // When satisfying the terms of a real estate contract, good funding from the buyer is crucial for the disbursement of escrow. Good funds refer to funds that are deposited into escrow balancing that can be applied towards the closing figures. Good funds can come in certified funds such as certified checks, buyer wire transfers, or lender wire deposited into escrow.
This requirement ensures a smooth and secure process, as it minimizes the risk of bounced checks or insufficient funds. By ensuring the availability of good funds, escrow can disperse the necessary funds to all parties involved, facilitating the successful and timely completion of the transaction.
Late Day Closings // The earlier parties can sign the lender documents, closing statements, title affidavits, and perform a wire authentication on the day of closing, the better the chances the file will be funded the same day. Banks have a wire cut off ranging from 4 p.m. If a closing is scheduled for later in the day, it can be very challenging to get all the closing and escrow tasks completed before that wire cutoff time.
Incomplete/Missing Documentation // Missing documents or signatures on loan or transactional documents can significantly slow down the escrow process. It is essential that all parties involved, including the title company, ensure that all required documents are completed and notarized accurately to meet funding conditions requirements in accordance with the Closing Protection Letter (CPL), Contracts, and Lender Instructions.
Title Insurance Coverage // The timeline disbursement of escrow funds is crucial for the issuance of title insurance policies. In cases of funding delays, the property may remain unprotected during the interim period, leaving the title to property vulnerable to intervening liens. A title insurance company must ensure their underwriting processes are expedited to provide timely coverage.
Mitigating Funding Delays Risks
To mitigate delays and streamline the escrow disbursement process, all stakeholders should be mindful of the requirements to be executed and the expectations Private Lenders and investors have for a hired title company to represent the contract in satisfying escrow. The following strategies should be adopted:
Due Diligence // Conducting comprehensive due diligence before initiating the escrow process is essential. This includes thorough title searches, property inspections, and documentation reviews.
Communicating Milestones // Clear and transparent communication with all parties involved is crucial. Regular updates and prompt responses to all stakeholders can foster trust and ensure that everyone remains informed throughout the transaction process. Expect this from the title company.
Preventing Wire Fraud // It is essential to seriously think about using a third-party platform to authenticate the wire information, such as account number, routing number, and name on account for a pass or fail initiation. Prior to closing the transaction, electronically verify wire information and call the party expecting to receive proceeds to verbally verify account information and ensure the person receiving the money is a real person.
Lender Approval to Fund // Lender approvals will have specific requirements to meet prior to funding. Most requirements can be addressed by delivering the approved signed documents for their review and approval. Escrow is not permitted to be disbursed until the lender gives their official approval.
Hiring a Title Company // When selecting a title company, it is essential to select one that holds the necessary license to issue titles and has a team of experienced escrow professionals capable of handling complex title matters. A title company must demonstrate an understanding of private lender requirements, investor expectations, and title endorsements required to be issued with the correct ALTA policy.
Conclusion
In private lending transactions tailored towards investor transactions, it is necessary to find a title insurance provider with the ability to disburse funds in escrow quickly and efficiently. Also, most national title companies today should be SOC2 Certified and have ALTA Best Practices. Private Lenders need to ensure that a specific title insurance company is approved with their company. It is critical for stakeholders in the transaction to be aware of all requirements included in disbursing escrow to mitigate risks associated with delayed escrow disbursement. Additionally, streamlined processes and workflows can effectively mitigate delays in the escrow disbursement process.
Collaborating with a reliable title partner who maintains constant communication and offers thorough closing instructions is key. Considering that real estate heavily relies on referrals and repeat business, it is crucial to ensure that everyone involved in the transaction reaches the finish line with minimal stress and hassle.
