A Question from one of Matt’s readers-
I have a purchase agreement from a buyer and deposit on a house that I am buying as a short sale and selling to a rehabber. How can I close both transactions in one day? Do you know a title company in Lafayette, IN that would do it? What about a title company in Indianapolis that would do a double closing. Title seasoning should not be an issue on these deals since they are all cash. I am just finding that the title companies I contact say that their underwriters will not approve it because it is a “flip” which is illegal.
Back in the “good old days,” a real estate investor could find a great deal, lock up the deal with a contract, option or purchase agreement, and then “flip” the deal to another buyer. The investor was then rewarded for finding the good deal and for finding the buyer with a fee, charge, profits, etc. The nature of the investor’s reward depended on how the deal was purchased and then re-sold.
Often, the investor would assign her rights to purchase the property to her buyer. The investor would never take title to the property. There would be one closing- called a “simultaneous closing” or “double closing.” In other words, the investor’s assignment of the deal to the buyer, and the buyer’s ultimate purchase of the property would happen at one closing. Think of it as two deal closings in one. At the closing, the investor would be listed as a payee and would receive her assignment fee at that time.
What happened to the double closing?
We started hearing about mortgage fraud cases. There were so many cases of mortgage fraud over the past 10 years that there developed a presumption that “flips” were illegal. The rationale was that a property purchased on Day 1 for $100,000, for example, could not be “flipped” for $120,000 on Day 2, or Day 5 or even Day 90. The rationale was the property could not appreciate that quickly. Therefore, the final purchase price ($120,000 in our example) had to be fake, false and fabricated. There was no credit given to the investor for having negotiated a great purchase price and a better sales price. The presumption is that the second sales price had to be the product of a fraud on the mortgage company. Soon, title companies began refusing to hold “simultaneous closings” for fear of being accused of participating in mortgage fraud.
What if the ultimate buyer was not using mortgage loan funds to buy the property? What if the buyer were paying in cash? How could there be mortgage fraud on a flip, if there is no mortgage lender?
Sadly, state and federal prosecutors have scared appraisers and title companies to the extent that no title company will do a “simultaneous closing,” even if there is no mortgage lender involved! If any of my readers know of a title company that will still conduct simultaneous closings,” please let me know. Other readers are still looking to do simultaneous closings on cash-based flips.
It is true that mortgage fraud was and is a serious problem, although most of the really bad mortgage fraud practices seem to be happening less and less often. There’s more public awareness of mortgage fraud today, which has helped. More than 10 years ago, I started preaching about mortgage fraud. I remember announcing the formation of the Indiana Mortgage Fraud Task Force. I’ve lectured, written and begged investors to increase their awareness of mortgage fraud. Not only is it a crime, but the number of fraud cases has had a tremendous chilling effect of real estate investing. A few bad apples have screwed up simultaneous closings and flips for the rest of the real estate investing community. And that’s a bad thing for all of us, as flips served a legitimate purpose. Flips reward investors for finding good deals and matching buyers and sellers. As this is often work that realtors and brokers will not do, we should be encouraging, not prosecuting, investors for fair, honest and legitimate flips, even if they require a simultaneous closing to complete the transaction.
Years ago, I wrote a series of articles on mortgage fraud- “Mortgage Fraud- Just Say No!” If you’d like to learn more about mortgage fraud and how to avoid it, send me an email or comment. I’ll send you a copy of my articles on the topic.
One final thought. . . there is another type of flip. If you buy that property for $30,000 and add $20,000 of improvements, it is possible that the improvements raise the fair market value to $85,000, $90,000 or more. In that scenario, you should be able to sell the property for $90,000 or so, and not have to worry about mortgage fraud claims. Keep your receipts and photographs showing the before and after condition of the property and your improvements to it. You’ll have to prove the $20,000 of improvements, plus the increase in equity as a result of the improvements. Getting good appraisals and keeping lots of documentation are key to doing these “rehab flips.”
I was also asked recently about selling an LLC or corporation that owns a “flip house.” Selling real estate and selling an LLC or corporation are quite different. I’ll try to address that scenario in another blog post soon.