Illegal Double Closings in RealEstate?

By
Services for Real Estate Pros with Cherry Pick Reo's

As a property investor it's important to keep up with trends and news, but you also need to be able to separate fact from fiction! One of the biggest false stories in the media recently has been claims that double closings are illegal. They are not.

This misinformation has arisen from a number of indictments on what the media has described as "property flipping scams" which is totally different to double closings. Under the double closing system, the funds from the second closing are used to pay out the first closing.

An escrow system is used so the agent, or middleman, can trade the property and make a profit without using their own funds.. It is a legal, ethical and profitable process which investors have used for a century or more to create wealth.

You've probably read about what has been referred to in the media as illegal property flipping schemes whereby some people purchase inexpensive, poorly maintained properties , then carry out poor renovations and resell the property to naïve purchasers at ridiculously high prices, way above market value.

Generally it isn't the sale that is illegal, but the loan process as all those in the lending chain conspire to submit illegal loan applications in conjunction with a false appraisal. As a result, buyers end up with an over priced house and a loan they can't repay.

Unfortunately for the scammers, a lot of the loans are insured by the Federal Housing Authority (FHA), a government authority, which has now cracked down on the scheme and many of those involved now face the long arm of the law!.

If you read a media article, or hear a real estate agent or mortgage broker claim flipping is illegal you know they are wrong and you need to look further for up to the minute, well informed comment.

The controversy has had some affect on the industry with some title and escrow companies refusing to do double closings. Those that do continue with the practice quite rightly are well aware of the potential for fraud.

As a property investor it's up to you to remain in control of your deals, stay ahead of the process and anticipate issues that can affect the close, particularly if you are buying and reselling a property quickly using a double close.

Be aware that some financial institutions have implemented a "seasoning" process on the vendor's property. This means that if the seller hasn't owned the property for six month or more the financial institution will treat the proposal as suspect and reject the buyers application to borrow money.

This will leave you in big trouble if you purchased the property cheaply and are selling it on in a hurry for a profit. Before signing the contract make sure the buyer, their agent, and the conveyancing lawyer are all aware there could be a seasoning issue.

Better still, if you are really in control of the whole process you will be able to steer the buyer to a lender who is familiar with double closing and will ensure it is a smooth process. Remember, seasoning is just an underwriting suggestion, it isn't a law which has to be enforced.

Don't hesitate to go approach senior management if there appears to be a problem and the sales is likely to stall under red tape. You also need to be aware that when the buyer has applied for an FHA insured loan they can't avoid the ownership period requirement as FHA rules specify the seller must have owned the property for at least 90 days before selling it on.

There are no exceptions to this rule. This rules out the buyer going with an FHA loan in a double-closing but shouldn't be such a problem if you plan to repair and flip the property as it will probably take 90 days to do the repairs then sell the property.

Overall, only the FHA and sub-prime lenders invoke this requirement. FNMA guidelines have no restrictions on providing funds to purchase a property when the vendor is "turning it over" quickly.

Don't panic if some delays occur right up to signing hitch in a double closing situation. You can exercise what's called a "reverse assignment". In this case you just redirect your contract with the last buyer back to the owner and withdraw from the deal.

In this case, your "fee" replaces the potential profit on the deal. Make sure the arrangements have been documented clearly and secured by a lien on the owner's property so you receive your fee on closing.

Double closings are attractive for investors interested in flipping houses because they allow you to get around financing requirements by quickly moving money from one account to another, keep your purchase price secret by never exposing your contract, and work with less liquid buyers because the "assignment fee" is financed .

The first step is finding an attorney who understands, and is prepared to perform the double closing for you. Then you have to convince the buyer it's a good way to go. Scheduling the double closing is the biggest challenge in the process and involves some element of risk.

There's nearly always a last minute glitch, which may mean having to delay settlement for a few weeks, leading to your contract expiring, which in turn can led to you losing your binder, and then losing credibility by reneging on a contract.

Make sure you allow for all these factors in the contract - it will save you a lot of stress! Make sure you know all the risks and processes involved before trying a double closing.

Comments (1)

Phil Leng
Retired - Kirkland, WA
Phil Leng - Retired

Hi cherry pick,

You wrote this in 2009.

Since then it has become much harder to do.

FNMA now has a clause in the contract limiting this practice.

Phil

Jan 25, 2011 08:10 PM