A double closing is an investment strategy that allows investors to sell their properties quickly.
It is a creative exit strategy for real estate wholesaling and will help you keep your portfolio alive and profitable if used correctly.
In this blog, we’ll discuss what double closing is, how it works, and its advantages and disadvantages.
Let’s get started.
1. What is a double closing?
Double closing provides an alternative strategy to the popular contract assignment method.
This kind of closing typically occurs when an investor actually purchases a subject property only to turn around and sell it fairly quickly.
This is why it is called a “double closing.”
It sees the investor close two independent real estate deals – one with the original seller and one with the final buyer.
While it isn’t all that different from how one may typically buy or sell a property, it occurs in a much shorter period of time.
Sometimes a double closing can occur over just hours, days, or weeks.
2. How does wholesaling factor into double closing?
Before we get much further into double closing, we must discuss wholesaling.
Wholesaling is a real estate investment strategy that consists of finding and acquiring off-market properties with the goal of selling them to real estate investors (end buyers) for profit.
Wholesalers are middlemen who put deals together between sellers and buyers.
Ultimately, wholesaling and double closing go hand-in-hand.
Double closing in wholesale real estate is sometimes referred to as a back-to-back closing.
It is often the preferred method of transferring a property from a seller to a wholesaler and then to an end buyer (i.e. a real estate investor such as a flipper or a landlord).
3. How does a double close in real estate work?
To understand double closing, you must first break up the transaction into two deals.
The first transaction is A-to-B: the seller is “A” and the investor (wholesaler) is “B”
The second transaction is B-to-C: The investor is “B” and the end buyer is “C”
Then, you’ll follow these steps:
A real estate investor (wholesaler) finds a motivated seller who is willing to sell their property at a price below market value.
A-to-B transaction: Both parties then agree to a below-market purchase price.
B-to-C transaction: The investor finds an end-buyer and signs a new purchase agreement to purchase the property at a higher price. The closing for the B-to-C transaction will occur in close proximity to the A-to-B transaction (sometimes this can even be a simultaneous closing!).
The investor will then secure funding to buy the property from the seller.
When both transactions are complete, the investor repays the funding loan (if any) from the proceeds of the B-to-C transaction. The difference is the profit.
4. What type of transactions can a double closing occur with?
A double closing can occur with any type of real estate.
There must also be no prohibitive restrictions in place from a third-party lender.
5. Do you need to buy in cash?
No, double closings can be conducted whether the real estate wholesaler (middleman) uses their own cash, loan funds, or the end-buyer’s cash to close the A-to-B transaction.
6. When should you use a double close deal in real estate?
In general, it’s best to assign contracts when possible.
Thus, a double close real estate wholesaling strategy is typically best relegated to a reserve role.
If a selling contract isn’t possible, that’s when you should use this option.
7. What are the pros of double closing?
Double closing is legal
As long as you check your state or jurisdiction’s law to be sure, a double closing is treated like any closing legally.
The investor (wholesaler) buys the property and then sells it.
To ensure you’re in the clear, you should always work with a local reputable real estate attorney to stay updated on the latest rules and regulations.
Your state may allow or disallow double closing in real estate depending on the following points:
- Whether the investor is a principal in the deal (purchasing the property for him/herself)
- The source of funding used for both sides of a double closing
- Whether the investor is a licensed real estate agent or not
There are numerous misconceptions about both wholesaling and double closing.
Do yourself a favor and seek real estate legal advice.
This is the best way to know what you legally can and cannot do in your state.
Double closing keeps your profit secret
When you have a contract assignment, the end buyer often sees how much of a profit the investor makes.
In the event you don’t want the end buyer to see how much you’re making on the deal, this is the way to go.
With a double closing, the end buyer doesn’t see the A-to-B transaction.
TIP: Consider not attending your double close as the investor.
Instead, have your attorney or title company rep arrange your paperwork ahead of time and attend on your behalf.
This preserves your privacy in the deal.
Double closing leaves a cleaner paper trail
A double closing is structured to avoid communication obstacles and other “red tape” that often occurs when a real estate wholesaler tries to assign their purchase agreement to the end-buyer rather than purchasing it outright and selling it to an end buyer in a separate transaction.
Double closing ultimately avoids the certain state-specific regulations, financing regulations, and legal issues that come up in other closing maneuvers.
8. What are the cons of double closing?
Double closings can be stressful
Contract selling is stressful because the deal is never over until all papers are signed and money is exchanged.
In a double closing, you’ll do twice as much work because you have two different transactions.
In both scenarios, both you, the seller, and the end buyer must show up to close.
If not, then the deal won’t go through.
Double closings are often more stressful because of this.
There are more people involved, which lends itself to increased opportunity for obstacles to arise and a higher likelihood for the deal to not go through.
Plus, if the investor takes out a loan to purchase the property, then there are further complications.
What if the end buyer backs out?
How will the investor be able to pay back the loan?
If they can’t, then it could potentially hurt their reputation and prevent them from taking out additional loans in the future.
In real estate, people often only do deals with people they can count on and trust.
Keep this in mind if you’re planning to move forward with double closing.
There’s likely to be quite a bit of anxiety until you’ve officially closed!
Double closings can be illegal depending on your location
As noted above, double closings are legal in many states and jurisdictions in the United States.
However, some states and jurisdictions might not allow double closings.
It is up to you as the investor to verify this transaction and to consult a local real estate lawyer to guide you in this area.
Double closings are not typical transactions
Double closings present challenges when compared to assigning a contract.
In particular, many closing agents don’t like to take them on (either because they don’t know how to do them or because they don’t like to).
If you’re an investor seeking a closing agent, it may take some time before you’re able to find someone who is open to performing a double closing in real estate.
Double closings require specific scheduling
Double closings aren’t always easy to schedule because of all the moving parts and parties involved.
The investor needs to be prepared to devote time to make it all work and get everyone’s schedules aligned.
9. Where does the funding come from?
One of the largest problems with conducting a double closing is finding funding.
The investor (wholesaler) must be able to fund the deal to buy the property and take the title.
Fortunately, even if this is a challenge, there’s no shortage of options.
Borrowing from a traditional lender
Using transactional funding (flash cash)
Both traditional lending and cash deals are fairly straight forward.
However, you may not know how the two other deals would work.
We’ll walk through those now so you can get a feel for them.
Transactional funding (a.k.a. flash cash)
Investors don’t always have cash, but they need cash to simply gain the title.
This is short-term cash (a.k.a. flash cash) that allows them to buy the property immediately but not keep the property forever.
Their goal is to sell the property as soon as they can to a potential end buyer.
The flash cash method makes this possible.
They’re able to use the funds as long as they pay the money back almost immediately after (1-7 days), which makes it a short-term bridge loan.
Transactional funding is commonly used by investors because it is fast and easy to get because it is not based on creditworthiness.
The lender can also lend 100 percent, which benefits the investor as they don’t use any of their own money in the real estate transaction.
The hard-money lender will typically require that the end buyer has proof of funds (an earnest money deposit) in place before they’ll lend money.
If the loan will close quickly, then the cost of the loan is normally between 1-2.5 percent of the loan amount.
If it goes longer, then there will be additional fees, and this can cause the investor to lose money on the deal.
Single-source funding works by using the end buyer’s money to fund both transactions (A-to-B and B-to-C).
In order to use single-source funding, the close agent must agree to let the end buyer sign the closing documents and pay for the property before the wholesaler completes the A-to-B transaction.
When both sets of closing documents have been signed, the closing agent would close backward.
First, the money would fund the B-to-C transaction and then the A-to-B transaction.
Finally, the investor (wholesaler) would keep the difference.
Prior to the 2008 financial crisis, single-source funding was much more common than it is today.
10. How do you find an attorney who will do a double closing?
There are typically only a handful of attorneys in any one area who are investor-friendly and understand how to double close (assuming that a double closing is legal in your state).
Here’s a tip on how to find these special few: reach out to twenty or so other property investors, network with them and ask them who they use on their closings.
You can find local investors by googling “we buy property/land/houses in <your city>” and then calling all the companies that pop up.
Whenever you see a bandit sign, you can also call the number shown.
Once you talk to twenty/twenty-five other investors, you will likely see that a few names pop up again and again.
A double closing is a savvy method for real estate investors at all levels.
You may consider using this route if you’re flipping houses, wholesaling distressed properties, or selling raw land to developers.
Whatever it is you’re seeking, finding a dependable investing niche and strategy will ultimately serve you well.
Have a story about a double closing?
Let us know in the comments.
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Disclaimer: we are not lawyers, accountants or financial advisors and the information in this article is for informational purposes only. This article is based on our own research and experience and we do our best to keep it accurate and up-to-date, but it may contain errors. Please be sure to consult a legal or financial professional before making any investment decisions.