Double Closing: A Real Estate Investment Strategy You Need To Know
Kevin Graham7-minute read
June 09, 2021
One way to get involved in real estate investing is to act as a wholesaler of properties. The advantage is that you can connect sellers with buyers while earning a profit as a sort of finder’s fee for yourself. Moreover, there is less risk for you because you’re not holding the property long-term.
One obstacle to a successful wholesaling transaction is juggling relationships between the original seller and your end buyer. One way to navigate that is to do a double closing where the transactions are handled separately between you and the seller and again between you and the end buyer.
What Is Double Closing?
Double closing can be an excellent real estate strategy for investors willing to purchase a real estate property in their name and sell the property as-is in under 30 days. Real estate investors often choose to double close in order to keep their capital gains under wraps from both the seller and end 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
Odds are that you're trying to wrap your head around the process at this point, so let’s move forward with an example.
Secure A Property
Properties that lend themselves well to wholesaling are typically distressed properties that are more difficult to sell on the open market because of their condition. An owner of these properties who is looking to get out from under them might choose to sell to you if you show an interest.
A savvy person in real estate may try to convince you that doing a wholesale real estate contract is the way to go. However, this makes it difficult to maximize your profits. While we’ll get into why below, one of your key arguments to the seller should be that you can take the risk out of the transaction for them by taking the property off their hands.
Once you buy the property, you can sell 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 so that you can turn a quick profit on the deal. You also have to find someone who is 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.
The first thing to get down is a clear description of what your buyer will be getting from you at the end of the transaction. For example, this could be the address of the property or a lot number. Second, you’ll have to get in writing what your liabilities are, if any, if you can’t secure the property for the buyer.
Finally, you’ll want to make sure that 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 make sure 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 thing relies on you being able to purchase the property in the first place before you can ever turn it over to anyone else. 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 that 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 thing working in your favor: 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.
If a personal loan doesn’t work, you could look at hard money loans. This is something you should be very careful with, though. These can come with high interest rate and other repayment terms which are disadvantageous for the borrower.
Double Close And Get Paid
Assuming you can 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. This is where you might want to learn the foxtrot because it’s a dance.
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 even. You’ll want to work with a title company to make sure all the contracts are in order going into the day of the double closing. You’ll be paid as soon as the funds can clear from the title company.
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Double Closing Vs. Wholesale Real Estate Contracting
Beyond double closing, the other way these wholesale agreements are commonly done is 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 run through the differences between a wholesale real estate contract and 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. In the end of the transaction, the seller still holds the house title. Because of this, the final transaction takes place between the buyer and seller directly.
In a wholesale real estate contract, you’re paid the difference between the sale price and the price you agreed to with the seller after the transaction closes. The good thing about this is that you don’t have to worry about actually funding the transaction yourself. On the downside, you have to worry that you might burn a bridge with the seller if they see you were able to get a heavy markup. Jealousy is real.
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 that 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
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. You may choose to do so in the following situations:
- If you’re making a profit that would seem extraordinarily high to either the seller or your end buyer, a double close is preferable because they’ll be discreet transactions with neither party knowing how much you’re making.
- If you’re not a licensed real estate agent as a wholesaler, you may have to do a double close so that a title company can be involved and make sure that 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 associated with getting a loan 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
Before we conclude the article, let’s run through some of the pros and cons for sellers, investors and buyers when it comes to a double closing.
Pros And Cons: For The Seller
The benefits for the seller are that they don’t have to worry about finding a buyer – a big potential problem if the home is distressed. The wholesaler takes care of that for them. Additionally, in a normal sale, the buyer can back out of the deal. If you sell to a wholesaler, that becomes the wholesaler’s problem rather than yours.
On the downside, double closings aren’t legal everywhere. You’ll need to check with local laws. Additionally, you’ll have no contact with the final buyer, so you won’t be able to negotiate with them yourself or gauge why they’re interested in the property.
Pros And Cons: For The Investor
There are several benefits for the investor in a double closing, beginning with the fact that the transactions are separate, so neither the seller nor buyer have any idea how much profit you’re making. Also, you should check local laws, but because a title company is involved, you often don’t need a real estate license.
The negative for an investor is that two transactions mean twice the work. Additionally, there are more variables involved, meaning more ways the whole thing can fall through. You’ll likely need to carefully plan and have the closing agent available as well.
Pros And Cons: For The Final Buyer
From the perspective of an end buyer, a benefit is that a seller in a normal transaction will sometimes back out at the last minute. While the wholesaler you’re working with could also theoretically do that, it’s much less likely to happen because there’s no sentimental value. They’re in it for the quick profit.
On the downside, you’ll never know the identity of the original seller. Therefore, you don’t know what the investor’s markup is. Because the sale is being handled through the investor third-party, you won’t have the same ability to haggle with the seller.
The Bottom Line: Double Closing Can Be Double The Work And Profits
A double closing enables a wholesale investor to protect the profit by keeping the purchase and subsequent sale to an end buyer as separate transactions. This prevents either the initial seller or the final buyer from knowing the profit margin and feeling in any way ripped off.
On the other hand, you’re closing a deal twice, which is a lot of work. You also need to coordinate heavily 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 because this isn’t necessarily legal in every state.
If you’re interested in acting as a wholesale real estate investor, check out this article on finding distressed property.
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