Illegal Double Closings In Real Estate?

Illegal Double Closings In Real Estate?

Author: Yolanda Bishop

As a property investor it´s important to keep up with trends and news, butyou also need to be able to separate fact from fiction! One of the biggest falsestories 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 mediahas described as "property flipping scams" which is totally different to doubleclosings. Under the double closing system, the funds from the second closing areused to pay out the first closing.

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

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

Generally it isn´t the sale that is illegal, but the loan process as allthose in the lending chain conspire to submit illegal loan applications inconjunction with a false appraisal. As a result, buyers end up with an overpriced house and a loan they can´t repay.

Unfortunately for the scammers, a lot of the loans are insured by the FederalHousing Authority (FHA), a government authority, which has now cracked down onthe 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 brokerclaim flipping is illegal you know they are wrong and you need to look furtherfor up to the minute, well informed comment.

The controversy has had some affect on the industry with some title andescrow companies refusing to do double closings. Those that do continue with thepractice 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 doubleclose.

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 theproperty for six month or more the financial institution will treat the proposalas suspect and reject the buyers application to borrow money.

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

Better still, if you are really in control of the whole process you will beable to steer the buyer to a lender who is familiar with double closing and willensure it is a smooth process. Remember, seasoning is just an underwritingsuggestion, it isn´t a law which has to be enforced.

Don´t hesitate to go approach senior management if there appears to be aproblem and the sales is likely to stall under red tape. You also need to beaware that when the buyer has applied for an FHA insured loan they can´t avoidthe ownership period requirement as FHA rules specify the seller must have ownedthe property for at least 90 days before selling it on.

There are no exceptions to this rule. This rules out the buyer going with anFHA loan in a double-closing but shouldn´t be such a problem if you plan torepair and flip the property as it will probably take 90 days to do the repairsthen sell the property.

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

Don´t panic if some delays occur right up to signing hitch in a doubleclosing situation. You can exercise what´s called a "reverse assignment". Inthis case you just redirect your contract with the last buyer back to the ownerand withdraw from the deal.

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

Double closings are attractive for investors interested in flipping housesbecause they allow you to get around financing requirements by quickly movingmoney from one account to another, keep your purchase price secret by neverexposing your contract, and work with less liquid buyers because the "assignmentfee" is financed .

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

There´s nearly always a last minute glitch, which may mean having to delaysettlement for a few weeks, leading to your contract expiring, which in turn canled to you losing your binder, and then losing credibility by reneging on acontract.

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

Specializing in commercial and investment real estate, Tony Seruga, YolandaSeruga and Yolanda Bishop are always searching for new and profitable commercialproperties across the U.S. Visit http://www.maverickrei.com for more greatinformation.