What is a Double Closing?
REtipster does not provide legal advice. The information in this article can be impacted by many unique variables. Always consult with a qualified legal professional before taking action.
How a Double Closing Works
A double closing often happens when a real estate investor (i.e. – wholesaler) finds a motivated seller who is willing to sell their property at a price below market value.
- The wholesaler/investor finds a motivated seller and both parties agree to a below-market purchase price (the A-to-B transaction).
- When the wholesaler/investor finds an end-buyer, they will sign a new purchase agreement (the B-to-C transaction) to purchase the property at a higher price and close on the same day as the A-to-B transaction.
- The wholesaler/investor secures transactional funding to buy the property from the seller.
- When both transactions are complete, the wholesaler/investor repays the transactional funding loan from the proceeds of the B-to-C transaction and keeps the difference as their profit.
Double closings can happen with any type of real estate, as long as the closing agent (i.e. – title company, escrow office or closing attorney) is willing to facilitate both transactions and there are no prohibitive restrictions in place from a third party lender.
Double closings can be conducted whether the real estate wholesaler (middle man) has access to their own cash to close the A-to-B transaction, access to transactional funding or flash cash, access to funding from a third party lender or the closing agent is able to close both transactions with single-source funding.
Why Do A Double Closing?
There are a few common reasons why real estate wholesalers utilize double closings.
Unlike an Assignment of Contract (where a wholesaler simply sells the rights in their original purchase agreement with the seller, and the end-buyer closes with the original seller in accordance with the contract), a double closing allows the wholesaler “middle man” to protect the identity of the original seller from the end-buyer and vice versa.
A double closing also allows the wholesaler to conceal (from both the original seller and the end-buyer) the amount of profit they are extracting from the deal. Since there are two separate closings, with two separate closing statements, the parties on both ends of the deal will not all the numbers. The original seller cannot see the final purchase price agreed to by the end-buyer, and the end-buyer cannot see the sale price agreed to by the original seller.
The structure of a double closing also allows the wholesaler/investor to keep a clear separation between the buyer and seller. It allows the wholesaler to circumvent potential accusations of trying to sell real estate on behalf of the seller without a license. Since the wholesaler is literally purchasing and taking title to the property before re-selling the property to their end-buyer, this type of transaction is functionally different from an assignment of contract (where the wholesaler doesn’t take title to the property, but simply sells their rights in the purchase agreement to another investor).
Funding a Double Closing
One of the inherent challenges of conducting a double closing is establishing where the money is coming from, particularly for the A-to-B transaction.
Since the real estate wholesaler is taking title to the property for a very short period of time, they need to either:
- Have access to their own cash reserves to close this initial transaction
- Get approved for short-term transactional funding (“flash cash” or same-day funding) to cover their purchase
- Have access a separate source of financing to purchase the property outright
- Find a closing agent who can execute the double closing using single-source financing
Not all title companies are willing to close transactions like this, which underscores the importance of finding and using an investor-friendly title company that understands the timing, financing and disclosures that real estate investors need to adhere to.
Advantages of a Double Closing
Double closings require a coordinated effort from the seller, the real estate wholesaler, the end buyer, the lender (if applicable) and especially the closing agent because there are multiple parties involved and time is of the essence.
Even with the extra effort required, double closings still offer some big advantages.
1. It Leaves a Cleaner Paper Trail
With a simultaneous closing, you aren’t likely to encounter the same state-specific regulations, financing regulations and even legal issues that often come up with other closing maneuvers that are designed to accomplish the same task.
A double closing is structured to avoid the communication obstacles and other “red tape” that commonly arises when a real estate wholesaler tries to assign their purchase agreement to the end-buyer, rather than purchasing it outright and then selling it to the end buyer in a separate transaction.
Even though the wholesaler may only own the property for a few minutes while they’re at the closing table, the fact is, they are becoming the actual owner during the process, which means their intent was true to what the purchase agreement says.
And of course, when the wholesaler sells the property, they’re selling a property they actually owned, so the issue of functioning as a real estate agent without a license isn’t nearly as strong of a case.
2. The Wholesaler Doesn’t Have to Disclose Their Profit to the Buyer
Unlike assignments, the wholesaler has the added benefit of never having to disclose how much they’re making make to the end-buyer.
The wholesaler can make $5,000, $10,000, or even $100,000, and the buyer will never know. This keeps things a lot cleaner and gives a neutral ground for negotiations.
Disadvantages of a Double Closing
Even though using a double closing has some huge benefits, there are still some drawbacks to this kind of closing maneuver.
1. Both the Seller and the End-Buyer Need to Perform
Just like with any real estate deal, the closing always has the potential to fall apart if either the buyer or the seller decide to back out and walk away at the last minute.
Normally, a real estate investor can control at least 50% of this process, because they’re either the buyer or the seller, and they can control their own actions and follow through.
However, with a double closing, there are three parties involved, not just two. Even if the wholesaler shows up to the closing as planned, the seller can still back out and ruin the deal, and the buyer can do the same thing.
When deals fall apart like, it can have a negative impact on the wholesaler’s reputation. Even if the wholesaler did nothing to cause the problem, this kind of failure can ultimately rub off on the wholesaler’s reputation.
Real estate is a people-based business, and what people think about one another, to some degree, actually does matter.
2. An Investor-Friendly Title Company Is Required
Performing a double closing requires a lot of attention to detail and extra effort in scheduling all the parties involved (not just coordinating everyone’s calendar, but also facilitating the distribution of funds to each party).
Not every closing agent is up to the task. Many closing agencies would rather focus on the “easy” deals that involve two parties, without all the complexities that come with double closings.
It might require several phone calls to local title companies or closing attorneys to find one who is willing to do the extra legwork required in these closings.
Legal Disclaimer: There are differences in the laws and statutes of each jurisdiction around the world, and double closings may not be in compliance with the laws of every market. It’s important to sit down with a local attorney to discuss the unique process and paperwork needed to do this legally and ethically where you do business.
3. Scheduling Two Back-to-Back Closings Can Be A Hassle
One of the most critical aspects of the simultaneous closing is timing the closings so they happen back-to-back.
Sometimes, the title company or closing attorney will work with you and be comfortable doing it a few hours apart, but to coordinate with three separate parties, and the availability of the title company, all in the same day. It can be a big challenge that any real estate wholesaler should be prepared to navigate through.