Double closing: A real estate investment strategy you need to know

One way to get involved in real estate investing is to act as a wholesaler of properties. You can benefit by connecting buyers and sellers, while generating an income – like a finder’s fee – for yourself. Moreover, you face less risk because you’re not holding the property long-term.

A common obstacle to a successful real estate wholesale transaction is juggling your relationship with both the original seller and your buyer. One way to navigate the situation is with a double closing where the transactions are handled separately.

What is a double closing?

Double closing can be an excellent real estate strategy for investors willing to purchase a real estate property in their name. Real estate investors often utilize a double close to keep their profits private from both the seller and the buyer.

The key to the double closing is that it’s two separate transactions – one between seller and wholesaler and another between wholesaler and end buyer. In this way, neither side knows what your markup is going to be for facilitating the transaction. This helps you secure a bigger share of the profit when buying an investment property and subsequently selling it shortly thereafter.

How double closing works

Let’s explore how a double closing real estate transaction works and uncover recommendations for the best way to conduct the sale.

Secure a property

A double closing is often a good option for distressed properties that may be difficult to sell on the open market due to their condition.

Once you buy the property, you can sell it for whatever a buyer is willing to pay. Think of the seller-to-wholesaler portion of this as the A-to-B portion of the purchase.

Find an end buyer

The next step is to find someone willing to buy the property from you. You also have to find someone willing to work with you, because you won’t own the property yet. For this reason, you’ll have to put a few special clauses into a real estate purchase agreement.

Make sure to provide a clear description of what your buyer will be getting from you at the end of the transaction – for example, the address of the property or a lot number. You’ll need to put in writing any liabilities that you have, if you can’t secure the property for the buyer.

Finally, you’ll want to make sure you limit the buyer’s ability to get out of the deal if you hold up your end of the bargain. All that said, states have different requirements for these contracts, so be certain you’re familiar with local law.

You can think of this as the B-to-C portion of the transaction. The original seller is A. You represent B in finding the property for your end buyer, who in turn is C.

Fund the A-To-B purchase

Of course, this entire transaction relies on you being able to purchase the property in the first place. Unless you’re independently wealthy from other business, an inheritance or the lottery, you’re probably not going to be able to come up with the necessary funds on your own.

It’s also not likely you’ll be able to get a mortgage for a property that you immediately intend to sell, either. How do you come up with funds? You may have at least one advantage: Distressed properties with motivated sellers are likely to be deeply discounted. If that’s the case, getting a short-term personal loan might help you obtain the funding you need.

You could consider a hard money loan if a personal loan doesn’t work. This is something you should be very careful with, though. Hard money loans come with drawbacks like a high interest rate and a shorter repayment term.

Double close and get Paid

Once you secure the funding to buy the original property and your buyer doesn’t back out, all that’s left to do is close the deals.

You’ll have to close with the seller of the original property, pay any closing costs and get titles and deeds signed over before selling to your end buyer – ideally later that day. It’s a good idea to work with a title company to guarantee all the contracts are in order. You’ll be paid as soon as the funds can clear from the title company.

Double closing vs. wholesale real estate contracting

Not every wholesale agreement happens by way of a double closing. Some are done through the selling of a wholesale real estate contract. As the investor, you contract with a seller, setting up an agreement to pay them a certain price when you find a buyer for the property. The difference between what you agree to and the actual sale price is your profit.

Let’s briefly consider the differences between a wholesale real estate contract and a double closing.

Transfer of ownership

When you enter into a wholesale real estate contract, you don’t actually gain ownership of the property. Rather, you get something called equitable conversion, which gives you the right to market the property on behalf of the seller. The seller still holds the house title. Because of this, the final transaction takes place between the buyer and seller directly.

Funds

In a wholesale real estate contract, you’re paid the difference between the sale price and the price you and the seller agreed to after closing. The good news here is that you don’t have to worry about actually funding the transaction yourself. On the downside, the seller is aware of what you made on the sale and may not be happy about the heavy markup.

On the other hand, when you do a double close, you have to fund the original purchase yourself from the seller before flipping it to a buyer you find. This requires access to more capital, but neither the seller nor the end buyer knows how much you made on the transaction.

When to double close in real estate

Now that you know the difference between real estate wholesale contracts and double closing, one of the big questions will be when it’s appropriate to double close. So, when is it appropriate?

• If you’re making a profit that would seem extraordinarily high to either the seller or your end buyer, a double close is preferable.
• If you’re not a licensed real estate agent as a wholesaler, you may have to do a double close so a title company can be involved and make sure the paperwork is done correctly. In some states, this is the only legal way to deal in wholesale real estate without being a real estate agent.
• If you can afford the closing costs or doing a straight purchase for the first transaction with the seller, there’s really no downside to doing a double close for the sake of protecting both your relationships and your profit.

Pros and cons of double closing

Let’s walk through some of the advantages and disadvantages of double closing that sellers, investors and buyers may encounter.

Pros and cons: For the seller

One benefit of a double closing for the seller is that they don’t have to worry about finding a buyer – a big potential problem if the home is distressed. Instead, the wholesaler takes care of this. Additionally, in a traditional real estate transaction, the buyer can back out of the deal. But if you sell to a wholesaler, that possibility becomes the wholesaler’s problem rather than the seller’s.

On the downside, double closings aren’t legal everywhere. The seller will need to check with local laws. Additionally, the seller will have no contact with the final buyer. This means the seller won’t be able to negotiate with the buyer or gauge why they’re interested in the property.

Pros and cons: For the investor

A double closing has several benefits for the investor. For example, neither the seller nor the buyer has any idea how much profit the investor is making. Also, because a title company is involved, the investor often doesn’t need a real estate license. It’s best to check the local laws first, though.

The downside of a double closing for an investor is that two transactions mean twice the work. Two transactions also mean more ways the whole deal can fall through. The investor will likely need to carefully plan and have a good relationship with the closing agent.

Pros and cons: For the final buyer

In a normal transaction, the seller sometimes backs out at the last minute. While the wholesaler could also do this, it’s much less likely to happen because there’s no sentimental attachment. They’re in it for the quick profit.

For the final buyer, the downside of a double closing is that they’ll never know the identity of the original seller. Therefore, they don’t know the details of the investor’s markup. Because the sale is being handled through the investor third-party, the buyer won’t have the same opportunity to haggle that they would with the original seller.

The bottom line: Double closing can be double the work and profits

A double closing enables a wholesale investor to protect their profit by keeping the purchase and sale as separate transactions. This prevents either the initial seller or the final buyer from knowing the profit margin and feeling taken advantage of.

On the other hand, you’re closing a deal twice, which is a lot of work. You also need to coordinate with several parties to get the timing right rather than sitting on the house forever. You’ll likely need the help of a closing agent. Finally, make sure you’re familiar with local laws to ensure the double closing’s legality.

If you’re interested in acting as a wholesale real estate investor, apply for a mortgage with Rocket Mortgage®.