To see how a back-to-back could happen, we look at the kind of deal that my lawyer-friend complained about, where the seller hides from the buyer the identity of the owner. Suppose you`re in the market for a Falcon 2000. Sal, an aircraft salesman, tells you that he has a great one that he would consider selling you for $20.5 million. After a few round trips, you agree to pay $20 million. You barked at him, and you think you have a deal. Meanwhile, Sal Owen, the owner of the plane, approaches and says he will buy it for $19 million. As Owen thinks it`s close to what the plane is worth, he agrees. Your sales contract is between you (the buyer) and Sals` company, XYZ Co. LLC (seller). Owens Deal is established in a second sales contract between Owen as a seller and Sal`s XYZ As Buyer. All your business is with Sal; You never talk to Owen and you don`t even know he exists.
Sal organizes the title search and tells you that this is clear, so you never see that XYZ Co. is not the registered owner of the aircraft. After some sort of prebuy valuation - the less, the better, as far as Sal is concerned you close and receive a sales bill of... Owen. What happened is obvious: Sal used your money to buy Owen`s plane for $19 million and cashed in $1 million, much more than a standard brokerage commission - which doesn`t mean Sal won`t try to collect one. In this story, it was you, the real buyer, who fought, provided Owen got fair market value for the plane. But it is often the other way around. If the buyer knows that the plane is worth $19 million and will not pay, Sal Owen will have to convince him to let him go for $18 million to return $1 million net. It looks simpler together than it is. Of course, Sal never intends to own the plane, even briefly.
If he`s not a business jet merchant with a lot of financial means, or just a lot richer than the typical back-to-back artist, he doesn`t have $19 million for a 2000 Falcon, no matter how much money is courtesy. In fact, Sal can`t even, say, put $250,000 on bail to a trust company. He will therefore want to use the real buyer`s deposit (and later the real buyer`s money) to buy the plane. As a result, back-to-back agreements are often highlighted in the funding phase of a fiduciary deposit and verification of the title. Sometimes it blows up the chord, sometimes it doesn`t blow up. (Note that if Sal takes over ownership of the aircraft or is considered a property right on the aircraft, it may be subject to claims from its creditors. Needless to say, Sal is unlikely to have AAA credits.) One of the reasons the deal can`t explode is that each party was willing to buy and sell at a certain price - when it`s a different price for everyone! But even if the dollars are acceptable, buyers and sellers should carefully assess the risks before using a back-to-back transaction.