Avoiding the Pitfalls of Closing Creative Real Estate Transactions

Getting to the closing table on creative deals can be challenging, frustrating and costly. How do we avoid these pitfalls?  Paying attention to these facts of your deal share some information that will increase the ease, speed, and profitability for your next deal.  

Research

Do your research on the property before you negotiate a deal. A simple $5.00 Ownership and Encumbrance report provides valuable information. This report will show who is the Owner of record as well as voluntary and involuntary liens against the property.  There are instances where getting to the closing table will be impossible without a legal matter taking a place, such as a Quiet Title action. Another example is if the Seller is in the middle of a Bankruptcy. You as the buyer are at the mercy of the timeline of the Bankruptcy court. Would this information be valuable to know before entering a contract?  YES!

It will also be beneficial to know the preliminary numbers for the transaction. Is there enough equity to pay off the necessary required debt against the real property? Is the Seller looking at a short sale?  Most Sellers care more about the net, the money in their pocket versus the purchase price. There are free title company-sponsored programs available to assist you in putting together a professional Seller’s Net Sheet. (Cont. Below)

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Contract

If you are not using the Division of Real Estate state approved contract, make sure you have a title company review your contract for the components necessary to close the transaction. Boilerplate contracts may not contain the essential elements we need in Colorado.  Title companies are working as scriveners and follow the directions given in the contract. For example, it needs to be clear how closing costs are to be allocated including real estate and Homeowners Association fees, what type of owners/lenders policy is to be issued, how taxes are to be pro-rated, what type of deed will be used, the timeline for the closing and who is to hold the earnest money.

Timeline to Close

If there is a loan in default, IRS lien or other such title issues to cure it may not be possible to close in 10 days. A title company will need the proper authorization forms to allow them to obtain the payoffs.  Understanding  the required authorizations and get them signed at the time the contract is executed would be beneficial for all parties.    

The title insurance industry is constantly changing as we adopt federal, state and other regulatory rules.  For example,  most title companies will no longer prepare a Deed of Trust and Promissory Note for a Seller Carry or private funded loan.  The parties themselves or a real estate attorney can prepare these forms. 

Creative Deals

The type of creative deals a title company may be willing to insure and close can vary drastically, so ask first, before ordering title and structuring your deal.

Types of creative deals a title company encounter are a “double close”, assignment contracts, subject to/wraps, assumable loans and lease to own.  As the industry changes so do the limitations and options available.

• A double close is just as the name indicates. Seller (A) enters a contract to sell to Buyer (B). Prior to (A) closing with (B), (B) enters into an agreement to sell to (C) under a new contract and terms.  These can be very straight forward if the (A) to (B) transaction is a fully funded closing and if the (B) to (C) transaction is cash or is privately financed.  However, if the (A) to (B) closing does not fund at signing and closes in escrow there are many requirements for proper disclosure to (A). 
• Assignment contracts, also referred to as wholesaling, are more common than double closing transactions. The Buy/Sale contract needs to allow for the assignment and the seller needs to participate via an amend/extend of the assignment documentation replacing the original buyer with the new and ultimate buyer. A title company can be provided with written instruction to collect the assignment fee, or more often this is handled outside of closing. 
• A subject-to closing is when the buyer is buying the property subject to an existing loan that is on the property.  The financing stays in place and is not paid off during closing. This would be considered an informal assumption and the lender may call the loan due and payable upon transfer based on the terms of the Deed of Trust.   It is important that the seller fully understands that their loan is not being paid off. It is beneficial to have a plan in place to obtain the authorization documentation to order a payoff when the property is sold, or the loan is paid off.
• Deeds of Trust may have the option for a buyer/borrower to formally assume the loan. The type of loan, timeframe and approval process varies among lenders.   Unfortunately, most conventional mortgages are not assumable. However, loans that are insured by the Federal Housing Administration (FHA), the Veterans Administration (VA) or backed by the Department of Agriculture (USDA) are assumable if specific requirements are satisfied.
• Lease to own deals are between the lessor and lessee until the lessee has fulfilled their obligation and can move forward with the purchase. Title companies do not come into play until the lease is replaced by a purchase contract and we are engaged for title and closing services.  We need clear direction on the purchase price, credits for payments received and closing costs.

This subject is very vast and always changing.  Each transaction has its own moving nuances. I would encourage you to interview title companies and learn more about the policies and procedures as well as what you can do to make it a smooth, quick and successful closing process. 

For any questions on this or other title questions, please feel free to reach me at Dmyers@firstam.com or call 970-308-3146

Cheers, go out and get your next deal!