Exit Strategies For Wholesaling. What Is a Double Closing?
What Is A Double Closing?
A double closing or simultaneous closing as it is sometimes called is when you (the buyer) actually take title to the property just before you sell it. This means that your name or the name of your company will go on the chain of title whether you sell the property the same day (which is typical for a double closing) or 30-60 days or more down the road. The main advantage to doing this type of closing is that you do not need to bring any of your own funds to the closing.
How Does A Double Closing Work?
The first part of the transaction which is typically called the A to B transaction is between you and your seller. The second transaction where you sell the property to your end buyer is called the B to C transaction. As a wholesaler, I am almost always funding the A to B transaction (my original purchase) with the funds from the B to C transaction. Simply put, my end buyer is bringing all of the money to the closing for both transactions.
There are two settlement statements created for the closing. One settlement statement or HUD-1 is between you and the seller which reflects the amount that you paid for the property. The second settlement statement is the transaction between you and your end buyer and reflects the amount you sold the property for.
What If I Am Not Working With A Cash Buyer?
Now this whole process probably seems very strange to folks that unfamiliar with double closings. However, I can assure you that they are quite common. This process works because the majority of the time I am selling my properties to other investors that are cash buyers. On the occasions when I am not working with a cash buyer, they will be using some type of financing such as hard money, a private lender or an investor friendly bank. If my buyer happens to be a rehabber, then it is quite common to get a “construction†type of loan from one of the local banks which will cover not only the purchase of the property but some if not all of the repairs. In all of these instances, the lender is familiar with simultaneous closings and you will find that they don’t have a problem with doing them.
How Does This All Work?
The key point to remember is that the certified funds are already in the hands of the attorney at the time of the closing for the B to C transaction, so there is a certainty that the first transaction (the A to B transaction) will close. As soon as the sale to the end buyer is completed, the A to B transaction takes place. The funds that I just “made†on sale of my property are actually used for my original purchase (the A to B transaction). I just love this process!
What Are the Negatives of A Double Closing?
In my part of the country, there just really aren’t any. We use closing attorneys rather than title companies for all of our closings. It only costs me about $300.00 - $350.00 on average for each closing. That comes to about $600.00 - $700.00 for both closings which I think is pretty cheap. Folks in my area are pretty much evenly split on whether or not they buy title insurance on the property. In most cases, I only own the property for about 5 – 10 minutes so I rarely buy title insurance when I am wholesaling properties.
Be sure to familiarize yourself with how things are done in your area. I have heard that some title companies won’t do double closings.
Can You Use A Traditional Lender?
If you are wholesaling a house and your buyer wants to use a traditional bank, you will most likely run into a seasoning issue. Seasoning is a term to describe how long a person has owned the house. The majority of banks will not fund the deal unless the title has been held by one person for at least 90 days. Some banks require you to own the property even longer. These rules were put into effect to protect homeowners from that small percentage of unscrupulous investors who were out to take advantage of folks.
Why Not Just Assign the Contract?
How you close your deals is a personal decision. I personally don’t like doing assignments unless my assignment fee is small. In my opinion the probability of the deal blowing up increases when you assign the contract. Your seller and your buyer see exactly how much you are making just for being a “transaction coordinatorâ€. And in most cases, they are not going to be happy with what they see. The larger your assignment fee, the higher the probability this will happen.
I always tell my seller from the very beginning, that I am not sure what I will be doing with the property. I let them know that at times I pass on properties to other investors, and they are always clear on the fact that my intention is to make money from this transaction. However, knowing this “intellectually†does not really alleviate the problem when they see just how much you made right there on the HUD-1.
So What’s the Answer?
For me, I almost always do double closings. I have only assigned the contract a few times in my real estate career. The advantages of doing simultaneous closings far out weigh the fact that I have to pay a little more in closing costs. Pick what works best for you, and you have made the right decision.