Posted by David Butler ANN on November 03, 2000 at 17:03:17:
Hello Tia,
Believe it not, that’s quite a mouthful;-) but here’s a quick try at a few “bites”:
“Simultaneous closing” as a generic term simply describes two or more types of actions related to title are occuring at ALMOST the same time (maybe just minutes apart). They are frequently used in exchanges, and other “contingent act” types of complex real estate transactions. But, as you have apparently deduced, simultaneous closing occurs frequently in both “flipping” (either real estate and/or notes) transactions, and in just plain funding transactions (notes being funded out at close, similar to a loan funding at close - but with major legal differences)as well. By the way, the simultaneous closing of a note transaction is also known as “table funding”.
As a creative real estate investor, I can get a signed purchase offer (now a contract) from Seller A for say $50,000, and assign the offer to Buyer B for $10,000 (assuming the proper assignment wording is in the contract). That’s my profit motive ;-). I put the $10k in my jeans, and the buyer now stands in my place in the purchase agreement to buy the property for $50,000. Or I can get a stronger option agreement from the seller, and simply sell the option to a buyer.
Obviously, in either case, the buyer’s true cost is $60,000 - $50,000 to the seller, and $10,000 to me. Personally, I like these two methods best whenever possible… less work, less complication.
But circumstances may call for another approach. So, I get my offer with the Seller, and then resell the property and do a double escrow transaction, where I am briefly on title, and where the buyer’s funds are coming into escrow to cover the deal, with me pocketing the $10,000 that way. The simple double escrow techique is getting more difficult to do for various reasons.
Where it is most difficult is when we are trying to bring “seller-financing” into the picture on a quick “flip”. And this is where a lot of folks get fouled up one way or another.
The most basic approach is where I simply am buying a property and asking the seller to carry the paper. Here, I close the deal, and give him his note. When I resell the property, I can let the new buyer take over the existing note (whether the seller is still holding it or not), if the mortgage has an assumption clause, or at least has no “Due on Sale” or “Alienation” clauses - or the buyer cashes me out, and I pay off the seller so I can give clear title to the buyer.
But what if my doesn’t want paper when I first buy the property? He wants cash… and he wants it at closing. And I don’t have cash (or at least I don’t want to give it to him). So, I arrange for a note buyer to purchase the note at the closing table (i.e. simultaneous closing/table funding), so the seller gets his cash, and I get my financing. This is a fairly simple maneuver, and is one of the bedrocks of CREI.
Two things to keep in mind here - many note investors are note investors because they don’t want to bother with all of the requirements of being licensed as a mortgage lender (which are extensive). So, they don’t make loans… they PURCHASE existing loans (or, in this discussion, private notes).
Second, seller carryback PURCHASE money mortgages (or trust deeds) are the most popular types of notes that these investors want to purchase, because these types of notes are EXEMPT from most every regulation with regard to federal and state mortgage lending and licensing laws (and the attendant disclosure requirements), and state Usury laws.
This sellers EXEMPTION is the primary attraction in note investing.
The complication creeps in when I am trying to use the sellers’ financing to both purchase the property, and then pass through the original seller’s financing to the ultimate buyer - and have a note buyer purchase the note at closing. This is very difficult to do correctly, while still protecting the seller’s EXEMPTION - to avoid putting the note buyer into the position of being a lender, avoid possible usury violations, avoid the dealmaking middleman from taking on the role of “arranger of credit” (i.e. subject to licensing requirements), and to avoid the repurcussions of inadvertently giving the Payor some UGLY defenses in a default action.
And it gets even more complicated if I am also trying to somehow pull cash out of the deal, with the cash coming out of the sale of the note, rather than from the property buyer.
In all honesty, there is no government agency policing exactly how these deals get done. It usually will only come up if one party in the transaction grows unhappy with the deal sometime down the road - or if they are just looking for a way out of their obligations - and hire a knowledgeable attorney. And such deals are done all the time (although not every one is fully aware of the risk they have placed upon themselves).
There are ways to get it done, and there are some awfully creative minds here on this board - hopefully you’ll get some deal structuring ideas, so I don’t have to write a book!
But one last thought worth noting - for now at least, funding these simultaneous closings is already a lot tougher than it was even just a year ago. Note investors are being more wary of the legal implications, so they are looking closer at how the deals are created at the beginning, so they don’t wind up holding the bag.
Secondly, in the “flips”, from a note buyers perspective… simultaneous closing has become almost synonymous with “FRAUD”. This is particularly so in the rehab sector. A great many note investors have found themselves holding worthless paper out of these deals… like subprime lenders who are going broke, note investors are learning to look at some of these deals a little more carefully!
Hope this helps, and best wishes for your success!
David P. Butler VP, Broker Relations
America’s Note Network
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