Gap Funding. What is it? Why are so many looking for it? And does it work? We will start with the first question – what is it? It is usually brought to a private money deal by a venture capital firm, or an angel investor, that covers the short fall between what you can obtain through a hard money loan and the shortfall you would not be able to make up out of pocket. There are some companies claiming to be able to bring you the difference and hold a 2nd lien on the property.
There are many investors looking for funds up and above the 60 or 65% that can be obtained in a 1st lien private money loan. Typically the borrower would bring the balance in cash to close the transaction. Many investors are trying to do as many deals as possible at once, which is spreading their funds thin. So they reach out to Gap Funders, and look for them to make up the balance. While in theory this sounds all well and good, I have yet to see one come to fruition.
Does it work?
I first encountered a loan with a gap funder at the beginning of 2012. Needless to say, that deal fell apart at the table as the gap funder did not provide the amount promised to make the transaction happen. I am going through this as I’m typing this out. I have a borrower that we provided a 65% arv loan to in California. 2 days after docs have been signed, the Gap Funder has still to wire the funds needed to close to escrow. How frustrating on all parties! Now on the day the funds are to be wired, the gap funder has stated they are reviewing the contractor estimate to make sure the numbers are right? How can you provide a contract, promise funds to be there, and then still have to review the deal like its day one?
From this, I would say I do NOT believe that Gap Funding works.