Double Escrow

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The Double Escrow, AKA Simultaneous Close, is a powerful method of "flipping" a property in a way that does not require either cash or credit. This method was devised by Bill Vaughn in 1972 - long before any of the "infomercial gurus" ever hit the airwaves.

In a nutshell, you arrange to buy at one price, then arrange to sell at a higher price. Both closings occur at the same time and place - hence the name.

The reason no cash or credit is required lies in a little-known part of the law which states in a double closing, neither sale takes place first - regardless of which one is actually completed first, the law says they were both done at the same precise moment. Therefore, either can transpire first.

So, your buyer shows up with his funds for his purchase from you. Since this amount is always larger than the amount you would owe the seller, the closing agent pays off your seller from those funds. Your seller is now paid off, and out of the picture. You now own the place - but only for a moment. You sign it over to your buyer, because he has already paid for it.

Short take example: You agree to buy a home for $170,000. You find a buyer who offers you $200,000. At closing, he puts his $200K on the table. The escrow agent takes out $170K and pays off your seller. The Title is then signed over to you, and you sign it over to your buyer. But there is still $30,000 on the table - that goes to you. It is your profit from buying at $170K and selling at $200K. Neat, huh?

There are those - among them Realtors, bankers and even lawyers - who will try to tell you the double escrow has been made illegal. There is no truth to that rumor. It is nothing more than a misunderstanding of facts. So, to clarify...

Some unscrupulous investors, appraisers and lenders got together and used the double escrow to perpetrate a fraud. They would offer full price for a property, then the appraiser would inflate the value, and the lender would provide the next buyer with enough money to buy it at the inflated price. This fraud prompted HUD (Housing and Urban Development) to initiate a policy (not a law - only the legislature can make laws) that would force lenders who offer HUD/FHA/VA financing options to include in their mortgages a little thing they call a "seasoning clause". This simply means that a mortgage cannot be given on a property that has not been owned for at least a year.

While this seasoning clause can make the double escrow more difficult, it does not make it illegal. Fraud is illegal - the double escrow is not. To avoid the effect of the seasoning clause, there are four methods:

• Buyer pays cash for the property, so there is no seasoning clause
• Buyer uses a bank that does not service HUD loans, or
• Buyer reminds the lender that the requirement for a seasoning clause only pertains to mortgages that use HUD/FHA/VA financing options. If the buyer is not using HUD, FHA or VA, the bank can drop the seasoning clause.
• The seasoning clause in a mortgage can be waived (and you can resell) as long as you adequately prove the property is worth your asking price.

The power of the double escrow is much understated. There are so many ways in which it can be used. You may use it as shown above, or "couple" it with other strategies. For example, use the double escrow to flip your lease option when the option is due. Or flip your land contract after the value has gone up. You can even use it in conjunction with note trading. The usefulness of the double escrow is almost limitless.