Monday, September 13, 2010

query via email: Is it legal to have a simultaneous closing?

Hi Diane,

My question concerns methods of closing. Is it legal to have a simultaneous closing?

In other words on an A to B and B to C purchase where the bank is A, I am B, and an end buyer is C.

At closing is it legal for B and C to sign papers, with the funds from C put into escrow, and then A and B close using funds from escrow on first signing to fund that transaction?

I hear some Title companies will and many will not. I would like to know the legalities on the issue.

Thank you, R

Hi, R:

I am not an attorney and am unable to answer your question about legalities.  As a title insurance agent, I can help you understand why I may or may not handle a transaction like this.

I insure title in PA and so there may be issues in FL of which I am unaware.  In PA the Dept of Revenue considers, as do I, that these are clearly two transfers.  Even if there are not two deeds in PA, both transfers are subject to transfer taxes.

When a transaction like this is presented, a title agent will consider whether or not there is a potential for fraud.  We insure against fraud and we also do not want to collude to defraud another party.  A test, then, is whether all parties - A, B and C - are aware of the simultaneous close.

This is the case in relocation transactions. In those cases a relocation company has advanced funds to a homeowner and holds a signed deed in hand pending the sale of the property to a buyer.  The buyer deals with the relocation company but at closing there may be two deeds - one from the owner to relo, then another from relo to the buyer - or there may be just one deed from the owner to the buyer.  In both cases transfer taxes are paid twice.  Everyone is aware of the nature of the transaction.  There is no fraud and there is no harm.

As to the specific transaction you mention:
"In other words on an A to B and B to C purchase where the bank is A, I am B, and an end buyer is C.

At closing is it legal for B and C to sign papers, with the funds from C put into escrow, and then A and B close using funds from escrow on first signing to fund that transaction?"

A title insurance agent is in the business of insuring title.  If the closing vests title in B, then B is the consumer and the one being insured.  The fact that C gave B the money, has nothing to do with the title agent.  If you then expect the title agent to convey from B to C, that's a second transaction and though it may happen at the same table, it is really happening after the first closing.

Since this type of closing has so often been used as a vehicle for fraud, honest title agents are hyper-sensitive and for that reason would be likely to pass on taking the business unless they are absolutely comfortable that everything is above board and there are no shortcuts.

I hope that explanation helps and thanks for reading!  ;)



Title Guy said...

I wouldn't do it - no way no how.

The issue isn't really one of disclosure to all parties, but rather one of good funds. If, in a normal transaction, A were to sell to B (and B used their own funds to buy the house), then B sold to C, there is no issue. However, if C's money is put in escrow for the B to C transaction, that money can't be disbursed until all aspects of the B to C transaction are in place - including B having title to the house.

If B uses C's money to actually purchase from A, they aren't using good funds to do so, since they must use C's money, and the title agent is committing a breach of their fiduciary duty by using another transaction's good funds to perfect a totally different transaction.

Diane Cipa said...

Hi, TG: You are presuming there is a hold on the C funds. I wouldn't do it either unless the first transfer was fully funded. I had presumed it would be.

Thanks for adding another angle. ;)

Title Guy said...

Yep - but C funds probably wouldn't be fully released by their lender unless they had some sort of assurance that B has the right to transfer the title - that's when you see title commitments that show the wrong owner on Schedule A. In other words, C's lender isn't going to release the funds unless they think B actually owns the property. B won't own it though until he uses C's lender's funds to purchase the property. There might be a proper way to do it with full disclosure, but in most circumstances I think it reeks of fraud!

Diane Cipa said...

A title insurance commitment must always show the actual vested owner. Under no circumstances, in this example, would the title insurance commitment infer that B is the owner.

If an institutional lender has no problem with the interim transfer from the vested owner, A, to B and then to C, I have no problem.

We see this situation sometimes with Fannie Mae transactions. The vested owner is a bank but the contract with the purchaser is with Fannie Mae. Our title commitment shows the bank as the vested owner. On Schedule B1, we show two deeds - one form the bank to Fannie Mae and then one from Fannie Mae to the insured buyer. No problem.