Gap funding experience?

Question

Can anyone tell me about any experience they have had with gap funding. How did it go? How expensive was it ? At the end was it a good decision? Is there any gap funding entity that someone can recommend that they have worked with that Is legitimate?
thank you

Denise Webster · Answer

Gap funding is real, but it is not always clean, cheap, or appropriate for every deal.

The main issue is that “gap funding” can mean different things depending on the situation. Sometimes it means a second-position loan behind the hard money lender. Sometimes it means a private lender funding the down payment, closing costs, or carrying costs.

Sometimes it is really a JV/equity contribution being described as debt.

The structure matters because the risk changes depending on lien position, control, repayment source, and what the senior lender allows.

Before taking gap funding, I would want clarity on:

• Is the gap funder taking a lien, a promissory note, equity interest, or profit split?
• Does the senior lender allow subordinate debt?
• Are the funds documented as borrowed money or contributed capital?
• What happens if the rehab takes longer than expected?
• What happens if the ARV or appraisal comes in lower than projected?
• Is repayment coming from sale, refinance, or another source?
• Are all costs included, including points, closing costs, insurance, utilities, taxes, and interest reserve?

I agree with the general caution you’ll often see in these discussions: expensive capital can still make sense if the deal has enough margin, but it can become dangerous when it is used to force a thin deal to work.

The best use of gap funding, in my opinion, is on a deal that already works and simply needs a stronger capital stack. The worst use is trying to use gap funding to compensate for weak numbers, weak reserves, or an unclear exit.

If I were reviewing the deal, I’d stress-test it with a lower ARV, longer hold time, higher rehab budget, and delayed draw reimbursements. If the deal still works after that, gap funding may be worth considering. If it only works under perfect assumptions, I’d be very cautious.

AJ Exner · Answer

Hey Dale,

So the best way to find some GAP funding is to look for private investors either in your area or that you know that would help. They are inherently riskier loans so it takes a baseline level of trust, or legal protections, to ensure that the Gap lender in question is protected because being in subordinate position on title means that if it gets sold for less (via bankruptcy or any number of proceedings), you are more likely to lose your money.

You also need to make sure that your primary mortgage holder on the deal is okay with there being a Gap funder. If you end up moving in that direction and putting all the dominos in place, the last thing you want is to get towards the end and have the deal denied because of that.

Unfortunately, most GAP funders keep regional to markets and people that they know and they keep them close to the chest. My recommendation would be to start finding deals and working local REI meetups to see who you can run into.

Good luck!