| By William
Bronchick
There has been a lot of negative press and
misinformation lately about double-closings. Many
people have been indicted recently under what the
press has labeled "Property Flipping Scams."
Misinformed lenders, real estate agents and title
companies will tell you that double-closings are now
illegal. In fact, they are nothing of the sort.
A double closing is simply two back-to-back closings
wherein the proceeds from the second closing is used
to fund the first closing. Both closings are done in
escrow so that the "middleman" can buy and
resell a property for profit without using any of his
own cash. The middleman profits because he buys the
property below market and resells it for market price.
This process has been done tens of thousands of times
over the last 100 years - legally, ethically and
PROFITABLY!
The so-called "illegal property-flipping
schemes" work as follows: unscrupulous investors
buy cheap, run-down properties in mostly low-income
neighborhoods. They do shoddy renovations to the
properties and sell them to unsophisticated buyers at
inflated prices. In most cases, the investor,
appraiser and mortgage broker conspire by submitting
fraudulent loan documents and a bogus appraisal. The
end result is a buyer that paid too much for a house
and cannot afford the loan. Since many of these loans
are insured by the Federal Housing Authority (FHA),
the government authorities have investigated this
practice and arrested many of the parties involved.
Despite the negative press, neither flipping nor
double-closings are illegal. The activities described
above simply amount to loan fraud, nothing more.
Newspapers have inappropriately reported the activity
as illegal "property flipping," rather than
simply "loan fraud." So, whenever you hear a
real estate agent or mortgage broker say,
"flipping is illegal", you know they are
misinformed. The misunderstanding of the flipping
business has not been without consequence. Many title
and escrow companies simply will not do a
double-closing. Fortunately, there's many that still
do double closings, but they are also keeping a close
eye on potential fraud (as they should).
Some lenders have placed "seasoning"
requirements on the seller's ownership. If the seller
has not owned the property for at least six months,
the lender will assume that the deal is fishy and
refuse to fund the buyer's loan. This may be a problem
if you bought a property cheap and are reselling it
quickly for a profit (the good, old American way!).
This should not be confused with LAW - it is simply an
underwriting guideline for some lenders. Of course,
guidelines are just that - by going up the chain of
command, you can generally get approval from loan
underwriting by showing the property is being resold
for a higher price because either it was purchased in
a distress situation (e.g., foreclosure) or that
substantial repairs were made. Keep good records of
your repairs to show to the lender.
If the buyer is getting an FHA insured loan, there is
no way around the "seasoning" issue. FHA
regulations prohibit the funding of a purchase where
the seller has not owned the property for at least 90
days, NO EXCEPTIONS. This generally should not be a
problem in a fix-and-flip situation, since it will
likely take you 90 days by the time you acquire, rehab
and sell. But, if you are planning on buying the
property and reselling it in a double-closing, the
end-buyer CANNOT go with an FHA loan.
Bronchick's Rule #14: Always Remain in Control of
Your Deals!
A smart investor should stay on top of the process and
anticipate these issues. If you are buying a property
and reselling it quickly, particularly in a double
closing situation, you must anticipate this problem
and deal with it. Let the buyer, his real estate agent
and his lender know that there may be a seasoning
issue. If you stay in control of the loan process and
steer your buyers to a mortgage company that doesn't
have a hang-up with double-closings, then seasoning
won't become an issue. Generally speaking, only FHA
and subprime lenders have the "seasoning hang
up" - FNMA underwriting guidelines do not
prohibit funding a purchase money loan where the
seller has not owned the property for a minimum period
of time.
If you do get into a last-minute jam in a
double-closing situation, there is a solution, which
is called a "reverse assignment". You simply
assign your contract with the end-buyer back to the
owner and step out of the deal. Your
"consideration" for doing so, is the profit
you would have otherwise made. This consideration can
be documented in writing and secured by a lien on the
owner's property to be paid to you at closing. |
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