As an investor, the conventional home buying process includes: finding a property, making an offer, finding a mortgage lender, and closing the deal. This typical process involves the buyer, the seller, and the mortgage lender. While that’s the standard process that all investors (both buyers and sellers) know, this closing option isn’t the only option available to investors. There are countless strategies that investors can take advantage of. And one of these options is simultaneous closing.
What’s it? Here is what you need to know about this closing strategy, including what it means, how it works, its pros, cons, and other necessary things you need to do to have a perfect closing using this method. So, read on to know more about this strategy!
What is Simultaneous Closing?
Simultaneous closing, also sometimes referred to as double closing, is a non-traditional financing option where two transactions were simultaneously carried out on a single property — the real estate transaction and the mortgage note transaction. The real estate transaction is the conventional property purchase deal between the home seller and the buyer. While the note transaction comprises the buyer selling the mortgage note (legal IUC) received from the property seller to the investor.
Unlike its name implies, this financing option may not necessarily occur concurrently. But it involves two deals contingent on one another, i.e., for the transaction A-B to be successful, deal B-C must be successful. In the traditional home-buying process, two individuals (the buyer and the seller) must agree to the deal. But simultaneous closing involves three individuals (seller, buyer, and investor).
How Does Simultaneous Closing Work?
Simultaneous closing is a non-traditional closing, which involves the buyer, the seller, and the investor. It also includes two transactions. For this deal to be successful, the buyer, seller, and the investor must agree to the same terms.
So, how does it work?
Simultaneous closing is different from traditional financing in that it doesn’t require the buyer to have a conventional financier — bank or mortgage lender. The buyer isn’t directly buying the property with a mortgage but selling the mortgage note (the legal document that obligates the payment of the property price) created by the seller to an investor.
During closing, the seller creates a mortgage note and gives it to the buyer. Then, the buyer sells the mortgage note to the interested investor. After receiving the legal IUC, the investor pays the seller directly in cash. And once the seller gets the fund from the investor, they transfer the property’s title to the buyer.
Once the seller transfers the property title to the buyer, they’re no longer part of the deal. So, the engagement is now between the buyer and the investor. And the buyer would need to fulfill the part of the deal to the investor based on the agreed terms and conditions.
Below is a summary of the processes involved in the closing transaction:
- The seller and the buyer agree on the term of the deal with little input from the investor.
- The seller creates a mortgage note (legal IUC) to help finance the property.
- The buyer sells the mortgage note to the interested investor.
- The investor pays the property’s price to the seller.
- The seller transfers the property’s title to the buyer, and they’ve completed their part of the engagement.
- The buyer needs to fulfill their part of the deal by paying the investor based on the agreed term between both parties.
As you can see from the above description, this financing option is more complex than conventional financing. And unlike traditional closing, it only requires the buyer and the seller to contribute to the deal with little to no input from the investor.
How Does Simultaneous Closing Differ From Other Financing Options
Like we said before, simultaneous closing is just one of the several financing options available for a successful deal. Because of its complexity, double closing can be overwhelming. So, for a better understanding of this strategy, below is a comparison with some other financing options.
Simultaneous Closing and Traditional Closing
The traditional closing involves the seller, the buyer, and the mortgage lender. It involves the typical stringent and lengthy process. It only requires a single transaction, i.e., the seller and the buyer signing the contract and the lender transferring the fund to the seller’s account. Finally, the property’s title is transferred to the buyer at the same time.
Alternatively, a double closing contract involves two transactions occurring on the same property. It’s a deal that occurs directly between the buyer and the seller with little contribution from the investor who wants to buy the mortgage. Unlike in the traditional closing that requires the involvement of the mortgage lender, this closing arrangement doesn’t compulsorily require the contribution of any third party in the deal. It’s a funding option for those that don’t qualify for the traditional mortgage.
Simultaneous Closing and Concurrent Closing
The concurrent and the simultaneous transaction are a bit similar in that both involve two transactions to occur for a successful closing. But except that, both closing arrangements differ. Simultaneous closing involves only a single property, while concurrent closing involves two properties — it means closing on two houses the same day.
First, you’d need to complete the process on the house you’re selling. And once you’re done with the first deal and funds are transferred to your account, you can now close on the second property. Here, you’ll pay for the property you want to buy with the fund received from the first transaction. It’s typically two traditional deals occurring at the same time with you buying and selling concurrently.
Pros of Simultaneous Closing
While this property closing option is complex, it’s also suitable for some investing situations. In this section, we’ll discuss its pros. Without ado, let’s dive in!
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Faster Closing
Unlike the traditional closing that requires the input of third parties (the lender, title company, and so on), this closing arrangement occurs directly between the seller and the buyer with little input from the investor. That means the closing reduces the buying process. So once the buyer and the seller agree on the terms and conditions of purchase, the deal can close.
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Fairer Terms
Simultaneous closing real estate financing doesn’t involve the typical home buying process because the property buyer doesn’t qualify for any mortgage. The investor can offer favorable and less stringent terms to the buyer since the deal isn’t with lending firms. For example, instead of paying the conventional mortgage rate, the investor can reduce the mortgage rate.
Moreover, the seller can also offer a favorable option to the buyer to compensate for the fast closing. Since the buyer isn’t financing with the conventional mortgage, the deal would process in a short time and have a less stringent process.
So because of these (short processing time and the flexibility of the terms), the property seller might be willing to discount the property’s price for you (the buyer). Likewise, you could eliminate some conventional fees (like title insurance, origination fees, and so on) because the buyer is not using the traditional financing.
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Seller Receives Funds Quickly
Unlike in the conventional home buying process that requires the seller’s mortgage company to receive the funds or the wire transfer to clear, the seller will be paid directly by the investor in cash. There is no wait time and no need to wait for the mortgage company to sort things out. As the home seller, you’re not dependent on any third party for your funds to drop.
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No closing Hassle
A conventional closing requires multiple people (the lender, seller, buyer, real estate agents, title and escrow agent, sellers, and buyers attorney) to be available during closing. However, because of the several moving parts, closing a property is usually stressful.
But with this closing type, the parties involved in the deal are fewer. And the seller is only required to give a mortgage note to the buyer — no hassle signing process. The buyer sells the mortgage note to an investor, and the investor pays the seller.
The Problems with Simultaneous Closing
While we’ve discussed the pros of simultaneous or double closing in the previous section, understanding the problem with this closing arrangement would help us make better decisions. So here are the Cons.
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It’s a Complex Process
The major problem with this closing arrangement is that it involves complex processes. To succeed with this closing option, all parties must understand and be familiar with this strategy. The buyer, seller, and the investor must understand what these processes entail. So for the deal to be successful, all involved parties need to maintain a high level of attentiveness and care.
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Difficult to Find Company to Insure the Property’s Title
The complexity and the speed of transaction completion make it impossible to verify all parties involved. It’s also impossible to ascertain the creditworthiness of the buyer. Hence, most title companies are usually unwilling to insure titles of properties involved in double closing.
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It’s stressful
Although the parties involved are fewer, the closing arrangement requires all involved steps in the process to be executed appropriately without delay. That’s because both transactions (the real estate transaction and the note transaction) are contingent on one another, i.e., one deal depends on the other. So for the deal to be successful, all parties involved should be current with the arrangement and communicate often.
Factors to Consider for a Successful Closing
If simultaneous closing seems to be a better option for your prospective home buying process, here are some factors you need to consider to close a deal using this financing strategy.
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Choose an Experienced Team
Generally, all real estate deals require an experienced team to succeed. The complexity of this financing option even requires a highly experienced team. All parties involved need to have previous experience in how the complex closing arrangement works.
Your real estate agent must have done something similar to this before. The attorney must be familiar with this funding option to create favorable terms. Likewise, the investor and seller should be aware of the type of deal.
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Have investors willing to buy the mortgage on standby
While it’s possible to wait till after collecting the mortgage note from the seller before finding an investor to sell the mortgage note to, you should have all involved parties on standby before starting the closing processes. That is, you must have an investor that’s willing to buy the mortgage note.
Knowing who your other parties are before closing will reduce the stress involved in finding investors. It’ll also enable you to close the deal in a short period. Moreover, you can negotiate a fairer term with the investor and seller when you’re prepared for the transaction.
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Communication is Essential
For your deal to be successful, communication is the key. The complexity of this financing method requires all parties involved to be up-to-date with the latest information. When you communicate, you create a bond with the seller and investors. And by this, you let them know the processes involved and whose part is next.
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Have a Backup Plan
And finally, you need to have a backup plan for each of your deals. Having a backup plan doesn’t mean that your current home buying process will fail, but it helps you better prepare for the unthinkable. For example, with a backup plan, you have an alternative investor who will be willing to buy the deal if the current investor fails to buy the mortgage note.
Bottom Line
If you’re interested in investing in real estate but you do not qualify for a mortgage, simultaneous closing is one of the financing strategies you can use. This financing option offers you flexibility and a faster closing period. Although it’s a complex option, a thorough understanding of this strategy will save you a lot of stress and a rigorous process. So if you think this option is for you, this guide covers everything you need to know.
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