What Is Contract Assignment & Double Closing?

In this blog, we’ll go over the 2 most common methods of wholesaling real estate. Wholesaling involves 3 parties: Seller (A), Wholesaler (B), and End Buyer (C). If you’ve ever looked up wholesaling, chances are you’ve heard of Contract Assignment. Here’s an illustration to demonstrate how it works:

First, A and B execute a Purchase and Sale agreement (P&S) for $100K. B then assigns his right to buy the property to C for a fee of $10K. On the day of closing, C brings the funds for the P&S to pay A ($100K) to the title company. On top of that, as a separate cost, C brings the money for B’s assignment fee ($10K). Finally C also brings the money to pay any closing costs.

The title company then takes care of sending $100K to A as agreed upon in the original P&S, sending B their wholesaling fee of $10K, and paying out the remaining closing costs.

This method is quite popular with wholesalers because they don’t need to bring any funds to the transaction at any point.

However, it does come with some significant down sides.

First, because C is bringing separate funds for the assignment fee to closing, all parties know the assignment fee amount. This can cause a deal to go south from a disgruntled seller or end buyer that thinks the wholesaler is charging too much and decides to back out because they feel like they’re getting ripped off.

Second, the legality of wholesaling is something that is quite heavily debated in the real estate investment world. Depending on what state you’re in contract assignment can be illegal depending on how you do it. More on that here if you’re curious:

Blog Post: Is Wholesaling Legal?

With that in mind, some wholesalers turn to a different method to avoid the pitfalls of assignment. It’s called the double close.

Here are the broad strokes of a double close as seen in the illustration above:

Just like in our first scenario, A and B execute a P&S for $100K. However, instead of B assigning their right to purchase to C, B will actually buy the property, take title, and resell the property to C.

In order to do that, B and C execute their own separate P&S, this time for $110K. Where the term double closing gets its name is from the fact that two closings (the one between A and B and the one between B and C) happen very close together.

Closing 1: B is the buyer and will need to bring the $100K that was agreed upon in the executed P&S with A plus any closing costs.

Closing 2: now that B has taken title in closing 1, C can now buy the property from B at the agreed upon price of $110K and pay any closing costs.

B is left with the difference between what he purchased the property from A for and what he sold it to C for. Think about it as an ultra fast flip that B is doing without actually making any changes to the property.

Now the downsides here are that as the wholesaler you still need to pay the closing costs for the first closing. On top of that, you need to provide the funds to close the first transaction. And if you don’t have a big pile of cash lying around, you’ll probably need to turn to a lender that can quickly fund your deal. That lender will charge you fees.

So why bother with a double close?

Some purchase contracts actually have no-assignment clauses which don’t allow you to assign the contract to an end buyer. For example, this is the case with bank owned REOs.

Remember how with the assignment method all parties know what you’re making as a wholesaler? Since double closing involves two separate transactions, neither the end buyer nor the original seller will know how much you pocket for your wholesaling services.

Lastly, the question of the legality of wholesaling goes away when you do a double close. You don’t have to worry about whether your assignment is legal or not if you are selling a property that actually belongs to you.

Now what if there was a way for you as the wholesaler to avoid bringing money to the table to fund the first transaction?

Enter the concept of Closing in Escrow.

Closing in escrow means that all parties to the two transactions sign the transactional paperwork the same day, but the actual recording, title transfer, and disbursement of funds happen afterwards.

What does this mean for the wholesaler?

If you instruct an investor friendly title company to perform both closings in escrow, A and B will sign their closing documents as will B and C on the same day. C’s funds will then be disbursed.

Instead of two sets of funds being used to fund both transactions, the title company just uses C’s funds to pay A for the sale of the property and pay B their wholesale fee. No need for the wholesaler to bring any cash to the table!

Only after the funds are distributed does the title company record the transactions. This way the title can transfer in the correct order: first from A to B, then from B to C.

So as the wholesaler, all you need to worry about is a few hundred dollars in closing fees!

There you have it. Which wholesaling method do you prefer?