Simultaneous Closings (Seller-Financed Notes)
Simultaneous closing, as defined by certain service providers and note investors, is a specific structure for selling real estate where seller financing is utilized, and the resulting financed note is sold to an investor quickly.
Definition and Purpose
A simultaneous closing is the sale of residential or commercial property using seller financing, which includes the sale of the seller’s financed note at the same closing, or within a month thereafter. Note investors, such as Success Investments, define it as a property transfer where a note created between the buyer and seller is purchased by an investor at the same closing table where the real estate transaction takes place.
The practice of simultaneous closings is considered by some to be viable, legal, and ethical. It is seen as a profitable alternative to conventional financing and a tool that solves problems and meets a huge need in the real estate community.
Benefits and Misconceptions
Proponents of simultaneous closings highlight several advantages:
• For the Borrower: They may avoid costly lender fees and do not have to qualify through traditional channels. The closing costs are significantly lower compared to a conventional loan (e.g., about $900 versus $4,000 for a $100,000 house purchase).
• For the Note Broker/Investor: It reduces competition for existing notes and allows brokers to work on paper they know is marketable. It helps leverage time and marketing investments by acquiring notes before they reach the general market.
Several common misconceptions about these transactions are addressed in the sources:
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Misconception
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Reality
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Source
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Only people with bad credit use these transactions.
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Many borrowers do not fit standard Fannie Mae guidelines, such as being self-employed and writing off income, owning multiple properties, or using untraditional sources for a down payment. Borrowers are often scrutinized more closely than with existing notes.
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Properties are below average condition or overpriced.
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Investors fund based on appraised value from a nationwide appraisal company, as their primary concern is the marketability of their collateral.
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Legal and Ethical Requirements
To ensure a simultaneous closing is executed correctly, the sources emphasize adherence to legal and disclosure standards:
1. Disclosure: Everything must be disclosed to all parties up front, both in writing and verbally. If a private seller carries a note and has sold more than five properties in a calendar year, they must disclose interest rates and closing costs to the borrower (Reg. Z, RESPA).
2. Usury: Concerns about usury are valid. The deal must be structured correctly so that the discount is applied to the seller, not passed on to the buyer. Usury applies to the interest rate the borrower pays.
3. Licensing: While some states require licensing to buy seller-financed notes, the laws in most states typically apply to third-party transactions, not simultaneous closings.
4. Closing Entity: Transactions must be closed through a legal closing entity, such as a title company or an attorney.
The Process and Structuring
A typical process involves various steps, from marketing the property using phrases like “Owner Will Finance, No Points, Easy Qualifying” to screening buyers and setting the sales price equal to the appraised value.
Key steps related to the financing and closing include:
• The note investor may assist in structuring the mortgage and note to minimize the discount.
• The seller and buyer sign a real estate purchase contract, and a deposit is placed in escrow. Document preparation is typically handled by a closing agent, attorney, or title company.
• The note is usually sold to the note buyer after the property buyer has made one payment to the property seller. The property buyer then makes all remaining payments directly to the note buyer.
• If necessary, a seller can use a contingent contract stating that the sale is contingent upon the owner-financed note being sold within a specific number of days after the closing date.
Summary of Alternative Definitions and Contingencies
The term “simultaneous closings” is also used in other contexts that involve real estate:
• Common Usage: Many people are familiar with it describing the sale of a property they are selling and a property they are buying on the same day.
• Investor Usage: Real estate investors often use it for buying and selling the same property at one closing or later the same day, sometimes using the proceeds from the sale to fund the purchase.
• Synonyms for these usages include double closing, back to back closing, double escrow closing, concurrent closing, and contingent sale.
The sources also provide advice regarding creating marketable notes: planning a simultaneous closing creates a greater sense of urgency to sell the note, depending on the need for cash. A note may become more desirable, or “seasoned,” once a number of payments have been made.
Summary of Simultaneous Exchanges (IRC Section 1031)
A separate source focuses on the legal risks associated with simultaneous exchanges under IRC Section 1031 for tax deferral.
The Constructive Receipt Danger
For a transaction to qualify as a valid IRC Section 1031 tax-deferred exchange, an Exchanger must exchange one investment property for another. Crucially, the Exchanger must never acquire actual or constructive receipt of the proceeds resulting from the sale of the relinquished property.
To avoid constructive receipt, a Qualified Intermediary (QI) must be used as a conduit for the sale proceeds, unless the transaction is a cashless two-party or three-party swap.
The sources provide examples where exchanges failed due to the Exchanger gaining constructive receipt of the funds:
• A multi-party transaction was deemed a sale followed by a reinvestment because the Exchanger had unrestricted control over the funds in the escrow account.
• A failure to make two escrows subject to the successful completion of the transaction in the other escrow resulted in a ruling of a sale followed by a purchase.
• An exchange failed when an escrow agent (who was also the corporation’s lawyer) violated the agreement and permitted the corporation’s president to control the disbursement of escrowed sale proceeds.
• A court held that a multi-party exchange was a sale, not an exchange, when the Exchanger had the discretion to terminate the escrow before using the exchange proceeds to purchase the replacement property.
In closing, it is important to note that the firm featured in some sources, NoteSolutions.us, clarifies that they are not lenders and do not provide loans.
