While many of the specific elements of real estate investing, such as a long-term versus immediate company plan, plan of action, and particular assets and qualifiers, are within the control of the investor, there are occasions when basic factors, such as the investor's state of residence, dictate certain decisions or processes. One example is the way an asset is closed on. Let's talk about wet and dry loans.

Dry Loans: What is it?

The act of closing on a property before the prospective buyer and mortgage lender provide the seller with the money set aside for the subsequent purchase is known as a "dry loans." It's a means of ensuring that the purchasing and selling process continues even in the event that financing delays arise, whether they are anticipated or not. In order for dry money to succeed, all participants must not only accept the rules but also sign all of the closing forms with the knowledge that money would be provided. Of course, to make sure the contract is solid, money must be authorized and guaranteed before signing is made.

Following approval, all parties go together on the day of the loan closure to sign paperwork and finalize the agreement. The drawback? An investor may only engage in dry fundraising if they reside in one of the nine states that have been recognized for this purpose:

• Alaska

• Arizona

• California

• Hawaii

• The state of Idaho

• Nevada

• New Mexico

• Oregon

• Washington

Investors in Alaska and California should be aware that there are closing alternatives for both wet and dry finance. Similar to conventional home loans, dry loans are financial instruments backed by a specific real estate asset that enable people and companies to buy real estate without having to pay the entire purchase price upfront. Until they finally purchase the property, the borrower makes a specific number of prearranged installments to repay the loan, along with interest, over a number of years. The bank may foreclose if the borrower defaults on the mortgage.

Dry loans can be either variable-rate mortgages (ARMs), which employ a set interest rate for the initial term, after which the rate will change according to a certain market index, or fixed-rate mortgages, where the borrower keeps the same interest rate throughout the life of the loan.

Wet Loans: What is it?

With its far tighter process and standards, wet financing is the exact antithesis of dry funding, which is perhaps why most states choose it as their closing choice. The seller obtains all monies either on the actual day of the loan completion or within a couple of days of it, contingent upon the procedure requiring all documentation to be submitted and authorized on that day.

The end result of the wet finance procedure, in contrast to dry funding, keeps the transaction proceeding swiftly without allowing time for revisions and reviews. However, in contrast to wet financing, dry funding guarantees the legitimacy of the transaction and offers an extra degree of consumer protection. That's mostly because of the drawn-out document approval procedure and the additional research required to finalize an agreement when all the paperwork is done, but the money is still pending.

Choosing which type of finance will be used on a particular property is frequently left to the discretion of real estate agents in states like Alaska and California, where both funding alternatives are feasible. When a wet-funded mortgage is authorized, the borrower gets paid money right away. After that, the borrower can buy real estate and finish the remaining paperwork to formally transfer the title. The loan documents will be sent to the bank for examination following the money transfer. Wet loans enable the transaction to happen until the paperwork is finished, which speeds up the buying process.

Dry Loans Versus Wet Loans

Wet-loan transactions are faster, but the danger is higher. With a wet loan, fraud and defaults on payments are quite likely. The seller's receipt of monies prior to the loan documentation's examination and approval poses a danger. If the bank finds after examination that the financial commitment is too hazardous, it will have to spend a lot of time and money canceling the mortgage.

A dry loan, on the other hand, is one in which the money is released only after all required loan and sale paperwork has been completed and reviewed. In addition to protecting consumers, dry financing also helps to guarantee that the transaction is lawful. There is more time to resolve or avert problems when the closing procedure is slower, and no money is distributed at the closure.

Dry loans originated in the pre-electronic banking era when transactions took longer because purchasers and sellers of real estate sometimes resided distant from other parties and their mortgage lenders. When the mortgage agreement is deemed to be formally closed, money is distributed. At this stage, the property can be possessed by the new owner.

Benefits and Drawbacks of Wet versus Dry Loans

With dry loans, both the prospective purchaser and the lending institution are more certain that the property up for sale is free of any pending legal difficulties. That could, however, cause the closing process to drag out, and the seller won't get paid until all the paperwork is finished. That frequently takes a few days to a few weeks.

Buyers and sellers may be able to complete a deal faster with a wet loan. The trade-off, though, is that there might be unforeseen legal troubles or other difficulties down the road.

The Bottom Line!

In conclusion, the choice between wet and dry loans in real estate transactions involves a trade-off between speed and risk. Wet loans, with their swift process, enable quick transactions but carry the risk of potential fraud and payment defaults. On the other hand, dry loans provide a more secure option, ensuring that money is released only after a thorough documentation review, offering protection to both buyers and sellers. Ultimately, the decision depends on the preferences and circumstances of the parties involved, with some states offering both wet and dry funding options.