This is a follow up to my first in a series of three blog posts on the concurrently closing transaction. In the first post, I explained the details of the transaction. And . . . for those of you who used to watch The Flintstones, it is a must read.
If you recall my example in the first post, Fred Flinstone is selling his home for $160,000 to Barney Rubble in a short sale transaction. Barney is then selling to Mr. Slate for $200,000 and planning a concurrent closing. This transaction is occurring in the state of California, and I am going to touch on some potential pitfall of this transaction. If you know of any cartoon characters working on the same type of transaction in another state, clearly the rules, regulations, and laws may be different.
While there may be many solutions or "work arounds", here are a few potential pitfalls:
- A concurrent closing must be disclosed to Party A's lender. In fact, Bank of America, among other lending institutions, now has language in their short sale approval letters that will nullify the agreement if there is a simultaneous closing.
- FHA has a 90-day moratorium on consecutive closings. This would disqualify many buyers who would otherwise be prime Party C prospects.
- Due to the increased risk, many title companies will not ensure a transaction of this sort.
- In the state of California, the Home Equity Sales Contract must be used when the equity buyer is an investor and the property is owner-occupied by an equity seller. With this contract, Fred Flintstone may be given certain rights of recision which could make the sale to Mr. Slate much more risky. (See the third post in this series for more details on this topic.)
- Within the last 18 months, I have very rarely seen a lender agree to a short sale transaction where they net less than 70% to 80% of current market value. So, there may not be a large enough margin to make this transaction truly profitable.
While I can see that there is definitely profit to be made in these transactions, I would advise that those who are interested in these transactions proceed with caution . . . seeking advice, and working with a qualified team of agents, lawyers, and negotiators.
Broker, Realtor®
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