There has been a lot of bad press about double closing and flipping real
estate recently. In fact, some lenders, real estate agents and title companies
will even tell you that double closing and flipping are illegal. Don’t believe
them. Flipping and double closing are perfectly legal. Flipping and double
closing real estate should not be confused with the so called property flipping
schemes, practised by unscrupulous investors, which are illegal. So, what is
flipping and double closing and how do you do take advantage of the benefits
without breaking the law?
While a typical property closing involves a title being delivered by deed
from the seller of the property to the purchaser, double closing also includes a
middleman. That is, the seller sells the property to a middleman (or dealer) and
then they sell the property to a third party (purchaser). In some states, this
double closing deal is referred to as double escrow. Double closing, or double
escrow, contrary to popular belief is actually quite legal and can prove very
rewarding for the dealer.
How is a double closing deal made?
Firstly, the dealer (middleman) agrees to purchase the property from the
seller by signing a written agreement. The dealer then on-sells the property to
the third party purchaser who agrees to purchase the property at a higher price
by signing a written contract.
The dealer of the property does not put up any money for the purchase. It is
the third party purchaser who outlays the money for the property. Where the
purchaser is borrowing the money for the deal, they will have the funds wired to
the attorney, escrow agent or title company (referred to as the closing agent).
The seller signs the deed to the dealer and the deed is then deposited in
escrow with the closing agent rather than being delivered to the buyer.
Following this, the dealer then signs a deed to the purchaser. This deed is also
deposited in escrow with the closing agent.
The double closing deal is completed when the closing agent delivers the
funds for the final purchase price to the seller. The dealer then receives the
difference between the initial purchase price and the amount paid by the
purchaser. The closing agent records the two deeds, one after the other, with
the relevant office.
Why double close?
Firstly, the main benefit of double closing real estate for property
investors is that they can purchase a property and then on-sell it for a profit
without outlaying any of their own money. For the purchaser or seller of the
property, double closing can offer a way of protecting their privacy by
concealing their identity from the other party, and using the dealer in the
middle as a type of agent.
What is the difference between double closing or flipping real estate and the
illegal schemes?
What the media refer to as property flipping schemes are entirely different
to double closing and flipping as described here in that their aim is to
artificially inflate the price of the property with the intention of selling it
to an unsuspecting property investor for much more than what the property is
actually worth. For example, a property may be sold many times in succession,
each time for an increasingly higher price. In many cases, substandard repairs
will be made to the property to help justify these inflated prices. Eventually,
the property will be sold to an unsuspecting, and usually unsophisticated,
property investor. In such schemes, the seller, appraiser and mortgage broker
are often in on the scam often submitting fraudulent loan documents and bogus
appraisals in order to convince the investor of the property’s ‘value?
It’s here where the law is being broken.
As you can see, these illegal schemes are totally different in that they are
fraudulently conning unwitting investors into purchasing a property for much
more than the property’s true value. As many of these investors are purchasing
with loans insured by the Federal Housing Authority (FMA), it is easy to see why
the Senate has taken such a keen interest by holding hearings into these
schemes.
Double closing and flipping real estate are legitimate real estate strategies
that can be used to create wealth for the dealer without giving to outlay large
sums of money. And for the seller and purchaser, using a dealer in double
closing and flipping deals can help protect their privacy.
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