Double Close

10 Replies

I would like to buy a multiplex property using a double close for the purpose of holding as a rental property.  I don't quit understand how that works.  Can someone explain how that might work.

Why would you need to do a double close if you are buying the property to keep it as a rental?

Ryan Dossey, Real Estate Agent in IN (#RB15001099)
800-347-9296

You are buying using a double closing? So are you buying FROM someone who is double closing, or do you want to double close with a tenant?

I'm not an expert, but here is my best explanation.

In a double close, there's a front and back-end. The front end is the first closing.

So Allen wants to buy a property From Bob and sell it to Charlie. Allen opens with Bob. Before Allen closes with Bob, he closes with Charlie. Allen can open with Bob by buying an option or with earnest money.

But he's wanting to buy the property for himself to hold as a rental so there would be no reason for him to have to double close unless the property is from a wholesaler. 

Ryan Dossey, Real Estate Agent in IN (#RB15001099)
800-347-9296

Okay, what I understand is that I can buy a foreclosure or a property below market value for price with the anticipation of doing the repairs and getting a loan on the money for the new appraised value of the property.  So I am up fronted the money by a lender for the first close and then I can borrow 75% or so on the new higher appraised value which is enough to pay off the first loan.  My only out of pocket would be the repair cost.  Does that make sense?

Are you trying to buy the contract from a motivated seller, then double close it to a cash buyer who will use it as a buy and hold?

@Gary Nething  

No, I am trying to buy a foreclosure with little cash out-of-pocket.

It sounds like you are talking about a cash out refi, which is different from a double closing. To do what you are referring to usually requires either seasoning-holding the property for a period of time-or at least rehabbing the property first so that it appraises close to retail, and then you can refi based on the higher value, pay off the first note and cash out. Not sure how you would othwise pull this off with a back-to-back closing.

@Gary Nething   

I think there is a confusion here with most responders. Most people thinking that you doing a double close (at the title company) where a wholesaler will do. What you;re asking is what i always do to minimize cash out of pocket. These type of double close is done by buying with 1st closing - 70% ARV but includes the rehab cost as well. Then you would refi it at 75% once the property is rehabbed. The 70% to 75% would ensure that you cover the closing cost of the 2nd closing. The original closing of 70% ARV is usually done with Hard money lending (or even private money) where by you buy at around 60% ARV then add rehab cost into it . Lets assume 10% rehab cost. Since the 1st closing loan amount is maxed at 70%, you cash out of pocket at 1st closing would be closing cost that goes beyond 70% of lending Assume that is 3-4%. You cash out of pocket would be the closing cost of 1st closing. That's how you minimize your cash out of pocket in the pipeline of two closings. In general this method reduces your cash out of pocket but you;re paying "redundant" closing cost which eats up into your equity. If you don't care about reduced equity as its more of a long term thing, this is a great strategy.

James

James and Shanti Kandasamy seems to have nailed the explanation pretty well.  The bottom line is that what you're talking about is NOT a "double closing" or "double escrow" in the terms we traditionally use here, which involves 3 separate owners - the seller (original owner), wholesaler (middle man), and the investor buyer.  What you are talking about is 2 separate financial closings on this property, where you will be the deed holder in both transactions.  Again, James nailed it pretty well.

There are a few things I will caution.

1.  Hard Money Lenders are expensive.  And, it doesn't sound like you have experience or a track record, which means the likelihood of them giving you a loan to include the full purchase price and rehab is slim to none.  With no relationship, no track record and no experience, they are going to want you to have significant skin in the game to create shared risk.

2. Your ability to refi the property into a conventional loan, once the rehab is complete, is going to be largely dependent on your ability to force appreciation through your repairs and rehab. That means you have to have a killer deal, your ARV calculations have to be spot on, and your rehab budget/timeline has to be nailed. Again, it doesn't sound like you have a lot of experience, so that's a lot of things that have to go just right to make that plan work.

3. If you are unable to force enough appreciation to refi and pay off the HML, you will only have 2 options, one of which is to come to the table with enough capital to ensure the HML is paid off and meet the down payment requirements of the lender. The 2nd option is to sell the property as a flip.

All of this leads to this fact...you MUST have multiple exit strategies.  And, I would say the less experience you have, the more exit strategies you need to have in place.

Thank you Hattie and James.  I think you have clarified it for me.