Real Estate “Flipping”- What happened to the “Simultaneous Closing?”

Posted on | March 27, 2009 | 14 Comments

A Question from one of Matt’s readers-

“Matt-

I have a purchase agreement from a buyer and deposit on a house that I am buying as a short sale and selling to a rehabber.  How can I close both transactions in one day?  Do you know a title company in Lafayette, IN that would do it?  What about  a title company in Indianapolis that would do a double closing.  Title seasoning should not be an issue on these deals since they are all cash.  I am just finding that the title companies I contact say that their underwriters will not approve it because it is a “flip” which is illegal. 

S.L.”

Matt’s Answer-

Back in the “good old days,” a real estate investor could find a great deal, lock up the deal with a contract, option or purchase agreement, and then “flip” the deal to another buyer.  The investor was then rewarded for finding the good deal and for finding the buyer with a fee, charge, profits, etc.  The nature of the investor’s reward depended on how the deal was purchased and then re-sold.

Often, the investor would assign her rights to purchase the property to her buyer.  The investor would never take title to the property.  There would be one closing-  called a “simultaneous closing” or “double closing.”  In other words, the investor’s assignment of the deal to the buyer, and the buyer’s ultimate purchase of the property would happen at one closing.  Think of it as two deal closings in one.  At the closing, the investor would be listed as a payee and would receive her assignment fee at that time.

What happened to the double closing?

We started hearing about mortgage fraud cases.  There were so many cases of mortgage fraud over the past 10 years that there developed a presumption that “flips” were illegal.  The rationale was that a property purchased on Day 1 for $100,000, for example, could not be “flipped” for $120,000 on Day 2, or Day 5 or even Day 90.  The rationale was the property could not appreciate that quickly.  Therefore, the final purchase price ($120,000 in our example) had to be fake, false and fabricated.  There was no credit given to the investor for having negotiated a great purchase price and a better sales price.  The presumption is that the second sales price had to be the product of a fraud on the mortgage company.  Soon, title companies began refusing to hold  “simultaneous closings” for fear of being accused of participating in mortgage fraud.

What if the ultimate buyer was not using mortgage loan funds to buy the property?  What if the buyer were paying in cash?  How could there be mortgage fraud on a flip, if there is no mortgage lender?

Sadly, state and federal prosecutors have scared appraisers and title companies to the extent that no title company will do a “simultaneous closing,” even if there is no mortgage lender involved!   If any of my readers know of a title company that will still conduct simultaneous closings,” please let me know.  Other readers are still looking to do simultaneous closings on cash-based flips.

It is true that mortgage fraud was and is a serious problem, although most of the really bad mortgage fraud practices seem to be happening less and less often.  There’s more public awareness of mortgage fraud today, which has helped.  More than 10 years ago, I started preaching about mortgage fraud.  I remember announcing the formation of the Indiana Mortgage Fraud Task Force.  I’ve lectured, written and begged investors to increase their awareness of mortgage fraud.  Not only is it a crime, but the number of fraud cases has had a tremendous chilling effect of real estate investing.  A few bad apples have screwed up simultaneous closings and flips for the rest of the real estate investing community.  And that’s a bad thing for all of us, as flips served a legitimate purpose.  Flips reward investors for finding good deals and matching buyers and sellers.  As this is often work that realtors and brokers will not do, we should be encouraging, not prosecuting, investors for fair, honest and legitimate flips, even if they require a simultaneous closing to complete the transaction.

Years ago, I wrote a series of articles on mortgage fraud-  “Mortgage Fraud-  Just Say No!”  If you’d like to learn more about mortgage fraud and how to avoid it, send me an email or comment.  I’ll send you a copy of my articles on the topic.

One final thought. . .  there is another type of flip.  If you buy that property for $30,000 and add $20,000 of improvements, it is possible that the improvements raise the fair market value to $85,000, $90,000 or more.  In that scenario, you should be able to sell the property for $90,000 or so, and not have to worry about mortgage fraud claims.  Keep your receipts and photographs showing the before and after condition of the property and your improvements to it.  You’ll have to prove the $20,000 of improvements, plus the increase in equity as a result of the improvements.  Getting good appraisals and keeping lots of documentation are key to doing these “rehab flips.”

I was also asked recently about selling an LLC or corporation that owns a “flip house.”   Selling real estate and selling an LLC or corporation are quite different.  I’ll try to address that scenario in another blog post soon.

REAL ESTATE QUESTION- Tenant Screening

Posted on | March 17, 2009 | 2 Comments

Question from one of Matt’s readers-

“How should I screen tenants?”

Matt’s Answer-

That is a great question and more important today than ever. As the foreclosure wave pushes more and more people out of their production homes and into the rental market, landlording is seeing a rebirth. Once again, it is not so bad to hold rental properties. Generally, the number of vacancies is dropping. And, more and more investors are moving away from the more creative real estate investing techniques and back to buying and holding rental properties.

Landlording is back!  (I never thought it went away, actually.)

For both the seasoned landlord and the newest of real estate investors, it is important to screen tenants and have a command of the tenant screening process. There are a number of factors to consider, such as:

· What forms do I use?

· Do I require an application fee?

· How do I screen?

· What is my screening criteria? What makes a good tenant?

· How do I avoid discrimination claims? What are my duties and rights?

· How do my rental application and lease agreement work together?

· Was does it really mean to “pre-screen” tenants?

· Should I use a tenant screening service?

These are great questions, and the answers are relatively simple. It does, however, take some time to learn about your rights, responsibilities and opportunities, as they relate to tenant screening. I cannot address all these topics here, but let me take the last question- “Should I use a tenant screening service?”

The answer is: Yes, you better. Using tenant screening services is the most cost- and time-effective way to improve your chances of a successful landlord-tenant relationship. Good tenant screening services are a bargain. I have written for more than a decade on the subject, and believe in them more today than ever.

Do “bad” tenants slip through, even with a tenant screening company helping you? Yes, it happens. But, for the most part, professional tenant screening greatly improves your odds of finding the best tenant in your pool of tenant applicants. I believe in tenant screening services so much that I agreed to teach a class on landlording, called “Landlording 101,” for the local office of the National Tenant Network, last year. WE WILL PROBABLY OFFER THE CLASS AGAIN THIS SPRING!  IF YOU ARE INTERESTED IN ATTENDING, EMAIL ME.

Also, once each month, I host the “Landlording Subgroup” of the CENTRAL INDIANA REAL ESTATE INVESTORS ASSOCIATION.  The next meeting will be held in my law office building- 151 N. Delaware Street, downtown Indianapolis at 6:00 p.m. on March 23.  If you’re a CIREIA member, register to attend the meeting at www.cireia.org.

At these classes, I answer the questions listed above. If you are a landlord and have not attended one of my classes, please do so soon.  If you haven’t established a relationship with National Tenant Network or another such service, do so this week. That is one of the first and certainly most important steps in the tenant screening process.

Indiana’s Security Deposit Law

Posted on | February 26, 2009 | 2 Comments

Question from one of Matt’s readers-

“Dear Mr. Griffith,

I rented an apartment in West Lafayette IN for six months and the lease ended on DEC 31, 2008. I had vacated the apartment on DEC 22, 2008 and left the keys and forwarding address with the landlord. Does the 45 days count from the date my lease ends or the date I left the forwarding address? I will appreciate your response.

Thanks,

S.A.”

Matt’s Answer-

Your question concerns Indiana’s security deposit statute, also known as the 45-Day Letter Rule.  Most states have a similar rule.  The 45-Day Letter Rule governs how a landlord of a residential property must handle the tenant’s security deposit after the lease is terminated.

In Indiana, the 45-day triggering event is the date the landlord regains possession. For you, that would be the date you returned the keys.

The statute requires the landlord to provide you (via US mail is acceptable) with an itemized list of any damages, which can include unpaid rent, and the balance of your security deposit, if any.

I represent far, far more landlords and property managers than tenants.  So, I can say with great confidence that the 45-Day Letter Rule is not well understood or even known by most landlords.  In fact, when I speak at the “Ask Matt” portion of the monthly meetings for CIREIA, I often ask how many attendees (real estate investors) do not know about the 45-Day Letter, and there are no fewer than 10 hands raised each time.

For more information on this law, visit the "Ask Matt" page at CIREIA’s website-  http://www.cireia.org/clubportal/ClubStatic.cfm?clubID=1507&pubmenuoptID=21366

Another question from one of Matt’s readers

"I was at the CIREIA meeting tues. and had a few questions about the 45 day rule.

1. Does it apply to section 8 also?

2.Does this also apply to section 8 unpaid utilities and any damages after they move out?

Thanks for your time,

B.H."

Matt’s Answer-

The 45-Day Letter Rule applies whenever any landlord takes any "security deposit" from any residential tenant in Indiana.

A "security deposit" is anything beyond the first month’s rent.  So, if you take the first and last months’ rent, you have a security deposit in the form of the last month’s rent.

What’s CIREIA?   

It is the Central Indiana Real Estate Investors Association.  I’ve been its Legal Affairs Chairman for more than 15 years.  For more information on CIREIA, go to its website- CIREIA’s Website.  If you are serious about owning investment real estate in Indiana, you should be a member of CIREIA.  Joining CIREIA for $150/year-  that’s a “no-brainer.”

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