I don’t have to tell most of you that title companies are nervous about closing two transactions involving the same property on the same day. Real estate investors can have a real juggling act on their hands when they’re trying to quick-turn a short sale, except it’s the title company who has to keep all the balls from hitting the ground.
The truth is that investors can open themselves up for all kinds of trouble if they don’t know what they’re doing. Those closings may look like some huge shell game to people, especially those whose job it is to uncover fraud in the real estate business. Nobody wants to be accused of being a scam artist, much less suffer the legal consequences.
Avoid accusations of fraud by simply setting some ground rules. Transparency is the key here. When you take the time to go over everything with the title company ahead of time, you can meet their objections with sensible procedures to make your back-to-back closings work for everyone.
1. Make it clear that the homeowner has no equity or negative equity in the property. Be ready with documentation like written gross payoff letters, which prove how much is owed on the property, and net payoff letters, which show the payoff after discounting the mortgage. The sales price minus the amount owed needs to be zero or less.
2. No cash back is allowed for the seller on the first (A-B) transaction. The purchase price, to be paid in full by the investor, is simply the total amount of all lien payoffs plus the cost of the conveyance fee for transferring the deed from the seller to the investor.
3. The homeowner in the first (A-B) closing and the buyer in the second (B-C) closing must be unrelated in order to prove that they are conducting two separate transactions.
4. The vested property owner in the first (A-B) transaction must be at the closing to sign the HUD-1 in person to show that they have received full disclosure of the terms of the sale, including the sales price. Also, the property owner and the investor/buyer must both agree to release the HUD-1 to the end buyer’s lender if that lender needs evidence of the amount of each lien’s payoff.
5. Any lender used by the investor, or the buyer in the first transaction, must give written evidence that they are aware of the investor’s plans to conduct back-to-back transactions to purchase and resell the property. However, as far as I know, the seller’s lender (the one who is foreclosing on the property) is not required to do this as their involvement ends after the first (A-B) transaction is closed.
If you have those five points covered, that juggling act can turn into a perfectly-timed relay race. This is one reason why I love being a real estate coach. I can talk about what I have learned over the years so you can know what you’re doing before you get into this stuff. If you’d like to avoid fraud in your investing business, take the time to learn from someone who has been there and lived to tell about it.
Help yourself avoid legal trouble in real estate investing. Keep reading attorney Jeff Watson’s latest words of wisdom about real estate law on the Strategic Real Estate Coach website!
