Need help with double closing! New investor.......

[kyrei]

Can somebody help me? I'm a newbie.  I found a motivated seller that wants to sell me his property for $50,000.  His house is worth $95,000.   I already found a buyer that is willling to pay $90,000 for it.  I want to do a double closing.  How does that works?  My other question is that what type of contracts do I give the motivated seller and the buyer?  Do I use the purchase agreement contract with the buyer and seller?????

My other question is with double closing, will the seller knows how much I am selling it for (profit)???

Will the buyer know that I purchase the property for $50,000??

Please help me......

Thanks

[Realtor Phil]

Call any Title Company.  They can advise you on all of your questions.  If they can't or won't move on in your phone book.  When you find one that will help you, establish a relationship with them.  They are invaluable people to know.

[chilln2music]

kyrei, keep us updated...I'd like to know how it went for you.

[eager2learn]

Kyrei,

Listen to realtor phil. Call a title agency that is willing to do a double closing. Just tell them that you are doing a double closing and that the seller and buyer must never meet. The title agency will make sure that all paperwork is handled and they will call the seller and buyer informing them of their respective closing dates and times.   You just show up as instructed and COLLECT A CHECK!

Eager 2 learn

[cparobbins]

Kyrei,
I posted this about 5 months ago to a similar question, so hopefully the moderators will allow this. It directly answers your questions. Hopefully not too late!


Assigning a Contract to a new buyer can be one of the easiest ways to make a quick profit on a house that you can get below value and flip to an end buyer. But.... the biggest problem with this is that everyone could end up seeing your profit at the closing table. The assignment ‘fee’ may be shown on the HUD1 (where both buyer and seller sign). Also, the end buyer has the right to see the contract that you have ‘assigned’ to him thereby seeing the price you are paying the seller. Many sellers have backed out at closing (legally bound or not) once they see the money they could have made on their own. End buyers have also walked away once they have seen the lower price that the seller is willing to sell for. Never mind all of your hard work and diligence finding the property, finding the buyer, and negotiating the paper work!

One alternative that MAY work is to flip the property –i.e., taking title. The problem normally that comes to mind with this strategy is two fold: 1) You have to take title to the property (even if only for a second) so there are double transfer taxes, double closing costs, etc., to pay...., and 2) the new buyer may have trouble getting a loan because now you have a title seasoning problem (most banks only wish to give loans secured by properties that have been held by the seller for 12 months or longer).

IF you have enough profit in your deal, you can offer owner financing to your new end buyer and then sell that seller financed mortgage at closing for the cash you need to 1) pay off your original buyer, and 2) to put a profit in your pocket. Remember all seller financed notes are purchased at a discount (depending upon the terms, buyer’s credit, etc.) .... so there must be enough profit to cover the spread. It will not work for every deal of course, but it is certainly a great tool to know about. It has saved me personally many, many deals that would have otherwise been lost.

Basically, it works like this. These numbers are used for example purposes only. Let's say you put the property under Contract with the original seller for $70k. Now you put the property under Contract to sell it to the new buyer for $100k, assuming it really will appraise for this (very important). Now you have $30k as your ‘spread’.

Suppose your new buyer can put down $5,000 in cash at closing and has "okay" credit of 600ish (stated income would be fine, of course). The deal can be structured so that you "the seller" carry back a $90,000 first lien, usually with an 8% interest rate (which you will sell to a note buyer at closing) and a $5,000 second lien, which you will keep and receive monthly payments for. Let's say the buyer purchases the first lien of $90k from you at closing for $78,000.

Now you have the $78,000 from the note buyer, the $5,000 from the down payment, for a total cash amount of $83,000 PLUS you have a $5,000 2nd lien to keep as an investment. The title company will take the $70k to close the transaction with your original seller and he will receive that amount, less any underlying payoffs and title fees.

You receive the difference: $13,000 in cash and a $5,000 2nd lien as an investment.  Not bad for a deal that you didn’t spend any money on! The title company will take out the transfer taxes depending upon what is stipulated in your respective Contracts. If you state the seller is to pay all of it on the first contract, and the new buyer is to pay all of it on the second contract, you can save yourself that fee (and any other split costs). Be careful to account for this.

Rehabbed properties (with proof of repairs) and regular properties without title seasoning problems can also be set up this way – with much better scenarios than the ‘flipping’ example above. Currently these properties can be set up at 95%LTV (Loan to Value) – EVEN INVESTMENT RESIDENTIAL PROPERIES! The discount on the note is usually about $6,000 -$7,000 if set up properly from the beginning. If the seller is willing, this is an awesome deal for the Buyer. It is a wonderful opportunity to purchase investment properties (1-4 units) for only 5% cash down!

This is just one way to save a deal where an assignment might not work. My husband and I have been buying houses via assignments, subject2, L/O etc., as well as investing in notes for years. We love using both businesses to be creative and get deals done that would have otherwise never closed.

Hope this gets the creative juices flowing!

Warmly,

[eager2learn]

Hi CPA,

I am a bit confused. Bare with me since I am still kinda new.   I thought kyrei was talking about wholesaling a property,not assighning a contract.  I was under the impression that assigning a contract  is having a contract with the seller , you then assign the contract to a buyer and the buyer and seller finally close on the property.  Then I thought that wholesaling is when one ties up the property with a contract, finds a buyer and attempts a simultaneous closing.  If you do two simultaneous closings aren't there two separate contracts for two seperate deals? Could you not give specific instructions to a title company to avoid either party seeing each other or finding out your profit?  Also could you explain more about the buyer and seller both needing to sign a HUD1 form.

Thanks
eager2learn

[cparobbins]

"Hi CPA,

I am a bit confused. Bare with me since I am still kinda new.   I thought kyrei was talking about wholesaling a property,not assighning a contract."

Eager... I think Kyrei isn't sure how to proceed and that is why I responded to him with the pros/cons of assigning a contract (with the seller to the end buyer) vs. taking title to it and then selling it (2 contracts, 2 closings). I didn't get from his posting whether he was trying to wholesale or retail the property honestly. Regardless though, he could still have trouble when his end buyer (an investor or an owner occupant) try to get a loan to buy the house since he has no title seasoning.

 "I was under the impression that assigning a contract  is having a contract with the seller , you then assign the contract to a buyer and the buyer and seller finally close on the property.  Then I thought that wholesaling is when one ties up the property with a contract, finds a buyer and attempts a simultaneous closing.  If you do two simultaneous closings aren't there two separate contracts for two seperate deals? Could you not give specific instructions to a title company to avoid either party seeing each other or finding out your profit?  Also could you explain more about the buyer and seller both needing to sign a HUD1 form. "

Eager... you are right about all of this. My comments about signing the HUD1 and both parties seeing the figures are during an "assignment" transaction, not the simo close. If you do a simo closing... yes, there are two seperate contracts and two separate closings. And yes, your closing agent 'shouldn't' disclose your numbers. Unfortunately it still happens sometimes, so be careful.  It is certainly the best way (in my opinion) to keep the numbers/profit undisclosed from both parties. It also depends upon which state you are in and which party has the right to choose the closing agent - so don't forget about that.  

The other biggest problem that I have come across when doing this as I explained in my posting, is the loan that the end buyer tries to get to purchase it from you... in the second closing. Most banks want the property to be owned by the seller for at least 12 months (title seasoning). Since the seller (that is YOU in the second transaction, right?) has only 'owned' the property for about 5 seconds in a double closing, this isn't possible. Your choices are to 1) find another lender (I have heard they are out there, but have yet to really find one) that will allow a double closing; 2) find another buyer that can pay cash; 3) hold the property for the 12 months and rent it out or lease option it (a good choice if you don't mind waiting to cash out); or 4) use the strategy of temporary seller financing that I explained in my posting.  These types of flips make selling the property quickly tough. I only offered a tool that allows you to sell it right away... if you need or want to. If you can make a good monthly cash flow by renting or L/O and don't need the cash (the equity) right away, then by all means... hold onto it. This temporary seller financing technique is just an alternative to traditional lending when you sell a property but it certainly isn't a replacement for it. It's just good to know about in our business.

Remember this discussion was just about flipping. It wasn't about buying a property, rehabbing it and then selling it. Or about just buying an investment property straight out. You can also use temporary seller financing for those cases also - with much better terms, I might add - but this discussion was really only about flipping (no repairs) the property for a higher amount equal or less than its true market value.

I hope I've cleared up your questions. Thanks for your thoughts!

Michele Robbins, CPA

[eager2learn]

Hi CPA,

  You brought up a couple of good points that I was not aware of concerning real estate. I definately plan on checking out my state's laws regarding who has the right to choose a closing agent.

Thanks for the info :D
eager2learn

[gareinvestor]

How do I find lenders that will even do assignments?

I have done a few contract assignments and the biggest problem I have is with the buyer's financing.  On cash deals, contract assignments are no problem.  But when the lender sees that there is a contract assignment, they shut it down.  They don't like seeing someone in the middle, who isn't a realtor, making some money on the deal.  I was told two reasons the lenders don't like it:

(1) Because the lenders think it is "flipping" (a word that can not longer use because HUD has defined flipping as colusion), and so they think something illegal is going on.

(2) Because notes that are written when the deal was an assignment are "less desirable" to the clearinghouses that ultimately buy those notes from the banks.  Let's face it, all notes are eventually sold.

As far as the seller and the seller walking away because of your profit, you can avoid that problem every time.  I always tell the seller and the buyer what I am doing.  In fact, if you plan to work with the same buyer regularily, you need to sit down and explain it to them like this:  "If I told you I could bring you a house with a FMV of $100k that needs $15k in work and sell it to you for $60k, are you okay with $25k in equity?"  If they say yes, tell them "What if I told you that I bought that house for $10k and I am going to make $50k selling it to you, do you still have a problem?"  If they say yes, move on.  If they say no and recognize that they could have never found that deal with out you, Great!  Yes, this example is extreme, but it makes the point and gets their attention.  The bottom line is that if the buyer is more interested in your money than theirs, you don't want to work with them.

[gareinvestor]

Actually I am trying to avoid double closings all together.  In Georgia we use Closing Attornies and not Title Companies to close.

[enricosuave]

Someone mentioned;

"The problem normally that comes to mind with this strategy is
.. 2) the new buyer may have trouble getting a loan because now you have a title seasoning problem (most banks only wish to give loans secured by properties that have been held by the seller for 12 months or longer)."
[END]

If lenders aren't willing to lend on a house thet's been owned for less than a year.. then how does REI work for anybody??  From what I've read, most are interested in doing the repairs and selling it out again in less than four, five months tops.

 Is selling a house really going to be hard unless you've owned it for -more- than a year??

[beaver124]

You would use an option contract for it.

Beaver124

[sammymh]

If a flip is what you want to do you must learn which lenders do not care about seasoning of title and inform your end buyer they need to use them because you have not owned the house for more than a year.

That is why having a good loan officer on your side is so important.  Find one that can prove he can get those deals done.

[cparobbins]

The other alternative (which was the subject of my response posting above) is the temporary owner financing strategy.

You can offer owner financing to the end buyer and then sell that owner financed note at the closing table, thus cashing out yourself - and getting the buyer into the house without title seasoning issues from the traditional lenders.