Most people think of selling a property by sitting at a closing table with a closing agent and having the buyer get financing using a conventional lender. While this accounts for many transactions, many are transferred from investors to other investors or end buyers using different techniques.
The following methods might seem to the casual reader or realtor as controversial but they are not illegal. I will mention how an illegal flip happens and how to avoid them. If you think you disagree, you should ask a local attorney for guidance.
1. Assignment of Contract – This method of making money in real estate requires no money and carries no risk for the investor buyer. The investor simply assigns his contract with a seller to an end-buyer who will step into the investor’s shoes, so to speak, at the closing.
The sale goes directly to the end buyer by deed and the investor is paid an assignment fee on the HUD-1 Statement or outside the closing. The end-buyer should be a cash buyer; however, if the end-buyer is getting conventional financing, the end-buyer’s lender should approve the transaction. The end-buyer will see the HUD-1 Statement at the closing or before, and there is nothing to hide.
2. Transfer of Beneficial Interest – Land trusts are hated by lenders and attorneys for various reasons including attorneys don’t get paid for closing the beneficial transfers and lenders can never be sure who the owners (beneficiaries) are at any time.
The beneficiaries remain anonymous in the public record and can be changed literally in minutes. Land trusts are used after a closing with a closing agent where the beneficiaries sell their interest in the property to a new buyer. The transfer takes minutes and is very simple for cash transactions. Generally, conventional lenders will not allow land trusts as owners of a property they are issuing a mortgage on – again, think cash transactions.
3. Change the Buyer at the Closing – This is probably most aggravating to the closing agents and isn’t generally allowed by asset managers for REOs or lost mitigation representatives doing short sales. We are again looking at cash closings and if the seller is motivated enough he will not stop the closing and will allow a new buyer.
If you are a seller, don’t allow the escrow to be refunded to the first buyer until you have another deposit from the new buyer. This keeps the first buyer from getting his deposit back and the second buyer not putting up the second deposit, resulting in a failed closing with no lost escrow deposit.
4. Double Closings – In this scenario the seller sells and closes to the investor buyer (A – B Transaction) essentially in one room of the closing agent and the investor then goes to another room and sells the property to an end-buyer (B – C Transaction).
The illegal flip, that so many people talk about, but don’t understand comes into play in the B – C sale if the end-buyer (C) gets conventional financing and the A – B transaction is funded with this money. Two ways to avoid this problem are to have the first leg (A – B) funded with transactional funding for just one day, and the second way is to get pre- approval by the end-buyer’s lender (not likely).
5. Use OPM and Quit Claim at the Closing – In these closings the investor uses borrowed funds from the end-buyer to close the A – B leg of the transaction and he immediately signs a quitclaim deed to the end-buyer. The issue here is the end-buyer will know the profit in the transaction which may or may not kill the deal.
In summary, there are ways to close investor deals using little or no money and taking minimum market risk and without having to get approvals of loans from conventional lenders or the drawn-out borrowing process.
A suggestion on the assignment of contracts – always double close if the profit is over a pre-determined amount, for us $20,000, as the seller may feel you made too much and the buyer may feel he paid too much. All contracts in most states are assignable unless they specifically state they are not in the contract.
By Robert Peters