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While much of the individual components of real estate investing – long-term vs. short term business plan, strategy, and individual assets and qualifiers – can be determined by an investor, there are times when certain decisions or processes are out of the investor’s hands and dictated by basic things like what state they live in.
How a property is closed on is one example. Enter dry funding and wet funding.
What is dry funding?
In short, dry funding is defined as the process in which a property is closed on before the buyer and mortgage lender distribute the funds allocated for the new purchase to the seller. It’s a way to keep the buying and selling process moving even if delays, either foreseen or unforeseen, in the loan’s financing emerge. For a dry fund to be successful, all parties involved have to not only agree to the terms but sign all the closing documents with the understanding that funds are forthcoming. Of course, funds have to be approved and guaranteed before signatures take place to ensure the deal is good. Once approval is met, all parties meet on the loan close date to sign documents and make the deal official.
The catch? Dry funding can only be done if an investor lives in a designated dry funding state – and only these nine fall under that umbrella:
• New Mexico
Investors living in either Alaska or California should know that both dry and wet funding are closing options. Which brings us to the next question…
What is wet funding?
Wet funding is the complete opposite of dry funding, having much stricter protocol and requirements and most likely why it’s the go-to closing option for the majority of states. The process requires all paperwork to be completed and approved on the day of the loan closing and the seller receives all funds either on the closing date or within two days of it.
Unlike dry funding, the finality of the wet funding process keeps the sale moving quickly without leaving room for backpedaling and reviews. On the other hand, dry funding, unlike wet funding, provides an added layer of consumer protection as well as ensuring the transaction’s legality. That’s primarily a result of the elongated process of document approval process, as well as the due diligence needed to close on a deal after papers have been signed but funding has yet to be received.
In California and Alaska where both funding options are viable, it’s often up to real estate agents to decide which form of funding will be used on any given property.
While both options have pros and cons to how they are handled and how closed deals result from them, they are just two of the factors that investors have no control over when it’s time to cross the bridge on buying a property. For more information on closing options in your state, contact Temple View Capital Funding, LP (“Temple View”) today.