How Escrow Companies Handle Double (Simultaneous) Closings
As general counsel for a title and escrow company, I often received calls asking whether we’d be willing to close real estate wholesale transactions, sometimes referred to as “simultaneous closings” (although that phrase has multiple meanings). I’d like to provide some thoughts here about ways we can and cannot close such deals.
Real estate wholesale transactions generally involve three primary parties. The wholesaler (#1) typically contracts with a homeowner (#2) to purchase their house at a certain price, preserving the wholesaler’s right to assign the contract to a third party. Once this first contract is in place, the wholesaler will then find a buyer (#3), and enter into a second transaction, by which the wholesaler agrees to assign the first contract to purchase the house to the buyer (or simply agrees to sell the property to the buyer) at a purchase price higher than that in the first contract. The difference between the two prices is the wholesaler’s profit.
At this juncture it’s important to note some major differences between working with a wholesaler versus a licensed real estate agent, not the least of which being the legal and ethical obligations requiring a realtor to keep a client’s best interests at the forefront and their duty of disclosure. These differences are magnified significantly where the buyer or seller is inexperienced or otherwise in a compromised position (elderly, physically ill, under financial pressure, etc.). Indeed, the practical reality that the wholesale transaction involves three parties, none of whom owe any particular obligation to the others besides what is set forth in their contracts, does in part drive what a title/escrow company can and can’t do in closing these transactions.
Here’s what most title companies cannot do. Generally title companies will be unwilling to close a wholesale transaction where both of the following apply: (1) the wholesaler does not have the funds to purchase the property from the seller outright before selling the property to the ultimate buyer and (2) the wholesaler wants to keep the seller and ultimate buyer in separate transactions (a.k.a. the “simultaneous close” via “single source funding”). For example, think of the transaction from seller to wholesaler as A to B, and the second transaction from wholesaler to buyer as B to C. Some wholesalers ask escrow companies to close on the sale of the property to the ultimate buyer first (the B to C deal) and use the money from that sale to purchase the property from the seller (the A to B deal). Here’s the problem with this approach from a title/escrow perspective: the wholesaler does not own the property yet, and the seller hasn’t provided instruction to convey title to the wholesaler prior to receiving funds, so the sale to the ultimate buyer cannot close first. The wholesaler lacks a sufficient interests in the real estate to convey at that point.
Here’s what title companies generally can do. Title companies can close a wholesale transaction when it’s structured one of two ways. First approach: when the wholesaler has the funds to purchase the property from the seller without reliance on the funds of the ultimate buyer (a.k.a. the “double closing”). This results in two complete and separate transactions. Second approach: when the wholesaler is paid an assignment fee by the buyer, which is shown on the buyer’s closing statement (“assignment transaction”). This results in one transaction, and seller and buyer both know that the contract has been assigned. Only buyer sees the assignment fee on its closing statement (and can do the math regarding the price seller was willing to sell the property to the wholesaler).
The Double Closing (first approach) provides the wholesaler with separation between buyer and seller, but requires wholesaler to have cash available (or a relationship with a lender who understands the nuances of the wholesale transaction and is comfortable providing a bridge loan that may only exist for less than a day). Because there are two transactions, there will also be an additional escrow fee to account for. The Assignment Transaction (second approach) eliminates the need for the cash purchase by the wholesaler (or the special financing arrangement), minimizes escrow fees, but also eliminates the level of separation between buyer and seller. Both will know the contract has been assigned, though only buyer would see the amount of the assignment fee on their closing statement.
Specific escrow instructions and a clearly written assignment/purchase contract from wholesaler to ultimate buyer help a title/escrow company get comfortable with closing a wholesale deal. Indeed, poorly written or hastily drafted agreements, or requests for a simultaneous close with single source funding, will trigger an experienced escrow officer’s “spidey sense,” raising red flags as to the propriety of the transaction. But keeping this in mind, there are certainly ways wholesale transactions can be structured so that a title/escrow company can comfortably close them.