Real Estate “Flipping”- What happened to the “Simultaneous Closing?”

 

A Question from one of Matt’s readers-

“Matt-

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. 

S.L.”

 

Matt’s Answer-

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.

15 thoughts on “Real Estate “Flipping”- What happened to the “Simultaneous Closing?”

  1. Matt — I submit offers all the time with financing contingencies — there are so many bank owned right now that there are not enough “cash” buyers — so financing, as long as it’s in the contract, can be a contingency. Of course, there are many other issues that may be contributing to his non-refunded earnest — like timing of the financing, reasons why no longer able to finance, etc. My guess is it had to do with timing issues and he fell outside of it.

    • Thanks Kelly. You would know!

      Kelly is an Indiana-based broker to whom I have referred many clients. I’ve always gotten great results for my clients using Kelly. In fact, I trust her so much that I recently referred a family member to her. That’s a family member I like, by the way. LOL

      So, as I had guessed, there are so few buyers that REO’s can now be purchased with a financing contingency. Oh how times have changed!

      A year or two ago, you had to fight to buy an REO, and you had to show proof of funds for a cash purchase. I remember having to show my bank account statement showing funds, before a bank would accept my offer on one deal. Not any more!

  2. Hi Matt,
    I am doing a double closing now. I’m using my buyers funds to purchase a property I have under contract. My title company still does them. Now, the problem that I ran into was the banks title comp did title. But they stated that since my title company is not a member of the same underwriter they refused to send title. So my title comp. is re-doing the title and the banks title is sending the deed. What do you think of the title company saying that they both have to be a part of the same underwriter for title to be insured?

    Scenario: The banks title comp ordered title. They overnight the closing doc’s to my title company. I sign, and my title comp. collects funds and wires them to the lender. Next they overnight the closing doc’s back to the banks title comp. (in most states this is called a courtesy closing). What do you think? Is this legal?

    • Dustin-

      Thanks for the question and for following me on this blog.

      You are running into the problems I’ve described. Double closings are not easy anymore. I was a little confused by your fact pattern. However, it sounds right that a CLOSING company (your bank’s title company) cannot insure a closing if its UNDERWRITER won’t insure the closing. It’s that simple, really. A title-closing company is not the insurer. The underwriter insures the transaction. Your closing/title company is like an insurance agent. The true insurer is not your insurance agent. In fact, an insurance agent is NOT your agent. The agent represents the insurer. An agent cannot obligate an insurer without the insurer’s permission.

      Avoiding fraud is really very easy: MAKE SURE EVERY PARTY KNOWS EVERYTHING! Seriously. Fraud arises when information is withheld from someone, and a deal that would not normally happen actually closes.

      So, if your bank, all title companies, your seller, etc. understand who is paying whom with whose funds when and how, then you should be fine.

      Let me know if you close this deal. I have some doubts. I don’t see anything in your comment post to indicate a change in circumstances that would permit a closing. But, I was unsure of your fact pattern. PLEASE LET US KNOW HOW IT GOES!

      Hope this helps.

      Matt

  3. Hi Matt,

    Thanks for the reply. I am set to close on Tuesday. The double closing is not the issue. My title company understands what I’m doing and they are fine with it.

    The issue that I had difficulty with was with the banks title company. I want them to pull title and insure it. However, I want to use my title company like a title company would use a mobile closer. They (the banks title comp.) overnights the closing docs to my title company, and my title company watches me sign and collects the funds. My title company then overnights the docs back to the banks title company and wires the funds to the bank.

    This did not happen. The banks title company, after pulling title and getting the deed recorded, canceled the title they pulled. However, I just want to use their title work, but just close at my title company. Isn’t this how mobile closings are done? Anyway, my title company will issue the title now, but I have to pay for the banks title work. While this is understandable, I’m having difficulty understanding why closing at my title comp is such a big deal if I’m using the banks title work. I hope this helps somewhat and thanks for the advice…

    Dustin

    • Dustin-

      A title search is akin to a professional service. One title company would not want to rely on the work of another title company, with one issuring the work of the other.

      Let me make an anology to explain this further. If your CPA prepared your tax return, another CPA would not guarantee the quality of that accounting work without knowing everything that was done to prepare the return. The second CPA would be a fool to insure the work of another CPA. So, the second CPA is going to do all the same work the first CPA did in order to be certain that the tax return is correct.

      Title companies are in a similar situation. The search could be dione well or poorly. The only way a title company knows if a title search is accurate is to do the title search itself.

      I’ve never seen one title company guarantee the accuracy of a title search done by another title company. It appears that is the issue here.

      Hope that helps.

      Matt

  4. I think I have this figured out now… Tell me what you think. The banks title compnay pulls title. I have my title compnay pull title too. This gets around the same underwriter policy issue as my title company has done their own due diligence. Then I just have the banks title company send over the closing docs and instructions to close. It gets overnighted to my title, I sign, and they overnight everything back to the banks title. The only down side I can see is I will be paying for the banks title search, my title search and the title search between me and my buyer. This should allow me to complete a double closing at my title company, right?

  5. I have a 3 story, mixed use property we’re looking to purchase with our non-profit corp. What I’d like to do is convert the 3rd floor to a condo, and sell it to ourselves as private individuals.

    I’d like to purchase the condo with 203-k fha loan, and close both transactions simultaneously.

    Then I wouldn’t have to get funding on the commercial property because we have 10% to put down on it, and the amount we’d need to finance would be the same as the purchase price on the condo.

    Is this legal? Are there title companies who still do double closes? I know it used to be fairly common to do deals of this sort, but I’ve been having trouble finding anyone who can advise me on this transaction.

    Thanks!

    • Shai-

      That’s a great question. Actually, there are several questions involved here.

      Fistly, where is this building? What state? What town? I’d need more information, but my first question concerns the zoning. Mixed use properties generally require a variance or special zoning. You might have the current owner seek a variance or rezone the property. Or you rezone it now with the seller’s permission. If you can’t get the rezoning, then you walk away from the purchase.

      If you get the zoning, you’ll need to create a corporation (in most states) to serve as the governing building association. Or, you can sometimes organize a condominium through contracts. In either case, you’ll need a plat, new legal descriptions, new deeds, a set of rules or governing documents, etc. Again, I’d need to know whether you live to give you a detailed answer.

      As to the 203-k fha loan, I’d suggest you ask a mortgage broker. In fact, see the blog post about the HomePath loan program and contact Mickey Brooks. He can help you with details on specific loan programs.

      In theory, when you rezone the building, you are creating two seperate properties with seperate legal descriptions- the living unit and the commercial space. So, in theory, you’re buying two properties simultaneously. To be more precise, your non-profit is buying one unit and you are buying the living unit in the same building on the same day. If your seller is willing to work with you, you can create two purchase agreements that are contingent on full performance of each other. A good real estate lawyer and a good loan broker can make this work for you.

      Best of luck.

      Matt

  6. I have two lot (house & empty Lot)Ther are two seperate PIN for each of them but only one mortgage. I want to sell the empty lot by itself to pay off 1/2 the mortgage. Is this possible without having to refinance into the house again? Will this type of purchase transection cause delay upon payoff? How or which way is the best way to deal with this?

    • Jose-

      Let me see if I understand your facts. . . You have two properties under one mortgage. You want to see one property and apply the proceeds to the mortgage. Correct?

      There are two possible answers to your question. EITHER the bank will simply allow the transaction, because you are going to use the cash to pay down the mortgage. Or, this transaction may already be permitted under your mortgage. You would have to read your mortgage. It appears that you might have a cross-collateral loan. Frankly, without having the documents to review, I cannot give you a complete answer. However, I cannot imagine a good reason for the bank to oppose your transaction..

      Now, if you intended to use the closing proceeds for some reason other than reducing the mortgage debt, the bank would likely refuse.

      Hope that helps.

      -Matt

  7. Matt, thanks for your reply. I should have let you know, This is being done because I am getting a divorse and I want my wife to stay with the house so I also want to remove my name from the mortgage as well. Her lawyer was talking about some type of Simultaneous Purchase Transaction Refinance on the mortgage, but I don’t know what that is?Can you explain?

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