GAP Funding is NOT Liquidity
A lot of lenders, especially today tell me they need GAP funding. What they usually mean is "I've identified a deal, but I don't have any cash and I'm hoping someone will cover the difference." - They need a partner with money, not a GAP lender. It's a common misunderstanding, but the issue remains that GAP funding is not usually for borrowers with no cash. In many cases, an investor needs MORE liquidity, not less, to qualify for GAP funding.
Most investors belive that GAP funding is to cover down payment and reserves - filling every hole the senior loan leaves behind. Not the case. GAP funding can help a capital stack covering parts of a closing shortfall or sometimes a portion of rehab or soft costs. GAP funding is very risky. It sits behind the senior lender, or it relies on a tight payoff even, resale, refi etc.. So a GAP lender needs to believe the borrower can actually execute. They are not looking for a brand new operator, with no real liquidity, and often a sub-optimal credit score.
So like with so many other things in life - the more money you have, the easier it is to obtain. A GAP funder will consider funding all or part of your equity shortfall, when it's clear you have the capital, you just don't want to use it. We all want to play with other people's money and we all want 100 percent financing. There are no end of "coaches" who will supposedly teach you how to stack capital and get 100 percent, but I have yet to see one that has actually delivered.
"But the deal has a ton of equity!" - that may be true, but equity on paper does not pay for missed timelines, insurance, utilities, contractors, draw delays, unexpected repairs. A 30%LTV deal can still fail if the investor just doesn't have the cash to pay for these things. It also makes the assumption that lenders are more than happy to take over a property. Some do, some even set up loans to almost ensure it, but at the end of the day having to foreclose and rehab or wholesale a property a lender has funded is expensive and not what they want. Most lenders want you to succeed, and won't fund a deal if they think you won't.
Let's also take into account that many lenders will not allow for a second position behind their lien. They may decline the loan outright if you tell them you are working with a GAP lender. It's also not something you want to hide. Even if you are current on payments, the discovery of a second lien can trigger a default provision. Once that default provision is enacted life get an awful lot harder a lot faster.
Finally, let's consider how expensive GAP funding is - you're already paying for the speed and flexibility of a private bridge loan, but now you add in a 20+% second note behind the first. At the end of the day you may actually be losing money between cost of capital, marketing costs and exit fees.
I know there are lenders for every situation out there, but I have yet to see a GAP funder that just wants to write a check for all the cash an investor doesn't have, and probably has no way to get. If anyone does know of that lender, please MAKE AN INTRO! I want to talk to that person.