Last week a veteran real estate professional asked me how to purchase notes at closing without being considered a lender and actually funding the deal.
The term "simultaneous closing" is really a misnomer when referring to a seller selling his property using owner financing, then immediately selling the note. Let's first clarify that knowledgeable Note Buyers do not fund real estate purchases for several reasons. Two of the most important reasons are:
1. Note Buyers do not want to be classified as lenders and be subject to SEC and Banking regulations and requirements.
2. The Note Buyer does not want to be subject to usury laws that govern lenders.
To make sure we do not fall into any of these categories, we make sure first there is a closing on the purchase of the property. This means the warranty deed is signed by the seller, the note and deed of trust are signed by the buyer, hazard insurance is issued making the property seller a loss payee, and mortgagee insurance is issued in the property seller's name.
When the purchase and closing are completed, the Note Buyer will then purchase the note. In a nutshell, this means the property seller, which is now the legal note holder, will endorse the note and assign the deed of trust to the Note Buyer. The Note Buyer will then inform the insurance company to be added to the hazard insurance as the mortgagee loss payee. The mortgagee insurance will also pass to the Note Buyer.
There is often confusion at title companies, even with an experienced closer, when note "simultaneous closings" are in the closing phase.
The confusion comes when there are underlying liens on the property. >From a title company's point of view, they are not going to insure title, not to mention issue a mortgagee insurance policy, when the underlying lien has not been paid. What is the solution?
Once you know the process of what is really happening, the closing is really quite simple. The solution is to write the contract to where the seller is selling the property and wrapping the underlying note. The title company closer can then close the sale and transfer the property on the wrap. This means the warranty deed has been signed, as well as the note and deed of trust has been signed. The Note Buyer will then purchase the wrap. When purchasing the wrap, the underlying lien will be paid off, and the seller will receive the balance.
For illustrative purposes, let's assume a house sells for $100,000 with a $50,000 first lien. The purchase contract states that the owner will finance the $100,000 purchase price, and wrap the $50,000 underlying note. Let's say the Note Buyer will purchase the $100,000 note for $80,000.
At closing, the buyer signs a note and deed of trust. The seller signs over the deed. The sale of the property is complete. Now the Note Buyer will purchase the $100,000 note for $80,000. With the proceeds, the $50,000 underlying note is paid, and the seller receives the $30,000 balance.
Now everybody is a happy camper. The seller got his equity, the buyer got a house, the Note Buyer got a quality note, and most importantly, the title company can justify transferring the property without using the Note Buyer's money to do it.
Bear in mind, there are some who believe this transaction is really just a loan in disguise, and will not purchase the note until a month later. So as usual, be sure to check with competent legal and tax advisors.
If you have questions about structuring notes, or know of someone who wants
to sell a note contact me at www.hpnotes.com
