How does a double close not create a clouded title?

Question

Hi all, quick question which has probably been answered already. I'm looking into the mechanics of wholesaling, if you will, and am just wondering how the investor purchasing from the wholesaler, then the wholesaler purchasing from the original owner portion does not create a clouded title situation? Obviously it works, I'm just wondering how. Sorry if this has already been covered, I just haven't found it. Thanks!

Will Barnard · Answer

the type of transaction Bill us referring to is a simultaneous closing, also called a dry closing where party B uses party C funds to close the A to B transaction. Consideration may or may not be the issue as consideration can be in different forms, but let's not get off topic there. Every State is different and thus, may or may not be possible to do this type of transaction in your area. In a wet closing, party b us use their own or narrowed funds to fund the A to B transaction and then sells in the B to C transaction where party C brings their own funds to close.

Jeff Rabinowitz · Answer

Chad, most of the time the LLC will be closed but there are instances where the buyer may prefer to keep the LLC. For example, if the buyer where also an investor who planned to use the home as a rental they might be planning on placing their new rental property into an LLC. In that case the buyer may choose to simply purchase the LLC (and the house that is owned by the LLC) from the seller and continue operating the LLC. A significant step up in sales price for the house may attract a higher tax assessment. A sale of the LLC will probably not. The assessor will not generally see the records for the sale of an LLC and that sale will not trigger a higher assessment. The occasion may also occur where the buyer (probably an investor) forms an LLC to acquire the seller's LLC for privacy reasons. In such a case the buyer may choose to continue both LLC's or only one of them. There are usually many answers to real estate questions. The best answer is often "it depends".

Bryan Scott · Answer

Hi Chad, In response to: @Bryan Scott Question regarding your LLC suggestion, likely a silly one. I've been told I overthink things on occasion :-P In any event, when the investor purchases the LLC, rehabs the house, and then goes to sell the house to a homeowner or what have you, how does that work? I don't imagine the homeowner purchases the LLC, so does the investor sell the house out of the LLC and then just close the LLC, or...? Thanks for the input by the way, seems like a pretty good way not to confuse the title. NEVER SILLY. I UNDERSTAND "OVER-THINKING" AS WELL - I WAS AN ENGINEER FOR 20 YEARS. THEY ARE PAID TO OVER-THINK. TOOK ME YEARS TELLING MYSELF IT'S OK TO MAKE QUICK DECISIONS, BUT BASED ON FACTS, NOT HERE-SAY, BUT I DIGRESS: THE SHORT ANSWER IS: YES, THAT'S IT. SELL TO OWNER-OCCUPANT, THEN FILE TO CLOSE THE LLC IS HOW IT IS HANDLED AT THE END OF THE CHAIN.

Wendell De Guzman · Answer

@Will Barnard got it correctly. A double close (A - B then B-C) is perfectly acceptable as long as B brings $$$ to close the first transaction. Dry closing is not acceptable in a lot of states and not acceptable to a lot of banks when they are selling their REOs. But back to the original question of @Chad Clanton : the answer is NO. Double closing does NOT create a clouded title issue because the title transfers from A to B...and then from B to C later on. In the chain of title in a double close, all three parties will appear but only after C buys it from B. But before then, on title (for a few minutes), B will appear on the chain of transfer. Makes sense or it's as clear as mud?

Bill Gulley · Answer

The issue is that the B party doesn't have funds to close the A-B transaction, consideration must come from B to be completed sale transaction giving good title to B in order to sell to C. Doesn't matter if it's seconds between transactions. C ends up buying a property from B who obtained title from a transaction that can be voided as B failed to pay consideration, that's the cloud. Solve that by explaining to A they are to seller finance to B with a note and B will pay off the note in full at settlement with A walking out with good funds. B has a note secured, the title transaction flows as if it's three minutes or three years later as a normal transaction. I'd just tell A what's being done and why, he doesn't need to know for how much. :)

Bryan Scott · Answer

Hey Chad, Notwithstanding new flipping rules, pitfalls with disclosure (RESPA) etc., a double-close (or back-to-back as some call it) is typically used when the "B" principal in an "A-B-C" transaction does not want the "A" or "C" principals to know how much of a flip fee they are actually making when the property is flipped to "C". So, on balance, one has to question how ethically acceptable such a transaction actually is in the first place, right? As a Realtor, I will NOT do such a transaction either for a 3rd party client, or for myself (read this as "I want to keep my license"). However, a more ethically acceptable approach in my opinion, which also avoids some other pitfalls, may be to contract a property in the name of a single-property LLC, (e.g. 123 Main St, LLC), making sure that your seller understands why you are doing this (disclose, disclose!), make sure the box about "Assigning" the contract is selected, then just flip the contract, which includes the LLC and it's interest in the property via the contract, to your "C" principal (your end buyer). If such a double-close is not doable, and you do not have available funds to close the "A-B" side, you can use Transactional Funding to get this done, so long as you know who your "C" buyer is. As an aside... Do you have a good Real Estate Attorney on your power team? Discussions about Double-Closes compels me to suggest you find a good one in your area to look over your shoulder on anything where there is not a Realtor representing the seller. This is major CYA. Good luck!

Chad Clanton · Answer

Bryan and Jeff, Thanks for the responses in regards to the LLC; that actually makes a great deal of sense, on all counts. Good pointers on the assessment, too. As always, the input is much appreciated, and thanks to all who responded!

Chad Clanton · Answer

@Bill Gulley I think I'm going to have to parse your latest comment further when I'm a little more awake tomorrow, but I think I got the gist. I'll definitely ask if I have any questions; thanks again for the input! @Bryan Scott Question regarding your LLC suggestion, likely a silly one. I've been told I overthink things on occasion :-P In any event, when the investor purchases the LLC, rehabs the house, and then goes to sell the house to a homeowner or what have you, how does that work? I don't imagine the homeowner purchases the LLC, so does the investor sell the house out of the LLC and then just close the LLC, or...? Thanks for the input by the way, seems like a pretty good way not to confuse the title. Everyone, thanks again for the unprecedented amount of information (unprecedented to me, anyhow). I love learning how these things work, and you guys really help. Take care, and happy investing!

Bill Gulley · Answer

@Chad Clanton , you're going to hear investors use all kinds of names for things, don't get tied up in what some transaction is called, rather understand how it flows and what the functional aspects are. In my neck of the woods, what I described is a double closing and we also call the same thing a simultaneous closing, what we are also talking about are back to back closings, I know gurus sliced up transactions with names, where the property owned by A in about an hour ends up being owned by C or the end buyer. Wet, with money or a note (or the equivalent by definition) which is accepted as consideration in RE settlements constitutes a funded transaction. Dry, they are speaking to the lack of consideration given or lack of funds available to close by some party in the chain. I have done A-B-C-D, the number in the chain has nothing to do with it. Dry can be a voidable sale transaction. The cloud is as I described above as when consideration legally required is not there. Consideration doesn't have two hoots or a holler to any state law, it's federal and is consistent in all states under code, which is the full amount of the sale in cash or it's equivalent, the equivalent must have an ascertainable value in dollars at the time of the exchange. There is no BS equitable interest, contract rights or the promise to marry the seller's oldest daughter. Jeff made a good point. Any lender should/will in making a loan to C and get a title commitment for a lender's title policy. They want to know the name of the buyer, the name of the seller and the property description and when you need the commitment, ordered more of them than anyone in this thread I'm sure. They will do a search and it will show that the title commitment is subject to certain occurrences, If Smith is your borrower and Jones is the seller, and your coverage may be shown as being subject to Jones obtaining good title, they may word it differently, like subject to title granted from Brown to Jones, but the lender knows there is something sideways, or should. If the seller does not appear in title, the title folks will be asking you, the title insurance client what's going on. Saying, if you are A or B, you need to coordinate the transaction, inform the settlement agent and how you want the settlement to proceed. That certainly doesn't mean you'll be influencing a closing agent or title employee to mislead a lender at the end, they can get nailed and it's easy to discover the chain and timing of settlements. Saying, B probably needs to have a discussion with the lender funding his buyer's purchase. If the lender's mouth drops open and then says no, you may need transactional funding, a temporary loan that just funds the transaction and is paid off minutes later. A title company should not be hiding the chain of title, it is a matter that a lender relies upon in making a loan and intentionally omitting information relied upon by an insured lender in making any loan is at the least an interference in lending operations and can be fraud, so don't even ask them to do that. Settlements have been under scrutiny in the past few years, the American Land Title Association (ALTA) is the insurance association that has regulatory authority or oversight over member title companies and sets policy nation wide. Disclosure of the chain of title must be able to be shown for any policy issued, as to the date and time of settlements and settlement documents retained on file for examination. You can go to their site and see what closing requirements there are. An owner's title commitment issued to a buyer, you and/or your end buyer, does not require, but can show the same chain requirements, in other words, the policy for Smith may only show good title being granted by Jones, the commitment may say, issued subject to good title granted by Jones, it may not mention Brown at all. probably more than you wanted to know. :)

Will Barnard · Answer

Hopefully we answered your question regarding the function. If you have more, please do not hesitate to ask.