What is a Double Closing?
A double closing is one way of flipping properties. In this scenario, you must actually purchase the subject property from the seller and you will actually own it (temporarily). “In Wholesaler Speak” we refer to the seller as “A” and you, the wholesaler aka middle man(or woman) is referred to as “B.” The first leg of the transaction is therefore referred to as the A to B transaction.
Now that you actually own the property, you can sell it to the end buyer – referred to as “C.”
Understand that two separate transactions (with two separate purchase agreements) are taking place here.
But what if I don’t have the money to purchase the property?
You probably won’t for some time. Instead you’ll use transactional funding. This is different from “hard money” which can be very expensive (2 or 3 points plus 12-15% interest). Instead, transactional funding is a very short term (usually less than 24 hr) loan that allows you to purchase the property so you can resell it.
If you’re doing deal anywhere in Florida, hit me up and I’ll hook you up with the best rate on transactional funding.
If you’re doing deals in another state, just ask any wholesaler in your market, your title company, or the head of your local REIA (Real Estate Investment Association) who they use for transactional funding. A lot of funders use a sliding scale to set the fee for the loan depending on how much you need to borrow – For example, 1% fee for up to $100,000, 1.5% fee for $101,000 – $250,000, 2% for $251,000 – $400,000, etc is common.
But have you learned nothing! Everything is negotiable! Ask several transactional funding partners and try and get the best rate possible. Never pay over 1%.
How does transactional funding work?
Here’s what this would look like. In order for a lender to fund your deal, this is what you need:
- Signed A to B contract (between you and the original seller)
- Signed B to C contract (between you and the end buyer)
- Buyer must have a non-refundable deposit in escrow at the title company
Let’s say I’m buying a property from a bank for $100,000 and I want to sell it to an end buyer for $125,000
- I submit all contracts to my title company
- Buyer wires in a non-refundable deposit (say $5,000 – this lets my funder know the buyer is serious)
- I call my transactional funder and let him know about the deal and the closing date
- On the day of closing, the end buyer will wire in $125,000 for the B to C transaction
- My transactional funder will wire in $100,000 for me to buy the property
- We close on the A to B side and then we close on the B to C side
- I now have the buyers $125,000. From those funds, I pay back my transactional funder his $100,000 that he loaned me, plus a 1% fee of $1,000. I now have $24,000 in profit (minus closing costs, which I left out for the sake simplicity in order to illustrate the general process)
Why Double Close?
An assignment of contract is typically the easiest and often most profitable way to flip a house. So why double close?
The primary reason is that almost all banks and many listed properties will no longer allow assignable contracts (although you can usually get away with it when you are dealing directly with a seller). The double close is your way of getting around this.
Another advantage of a double closing is that your end buyer cannot see how much you’ve paid for the property and subsequently how much profit you are making. I know, I know… in theory, it shouldn’t matter how much you’re making, as long as they are comfortable with their numbers and the profit they are making. But… welcome to reality, some people are weird, petty, jealous, need to make a certain amount more than you, whatever… and won’t be comfortable with you making a certain amount. When you double close, they won’t know. With an assignment on the other hand, they are aware of exactly how much you’re making. I like to stick to the $10,000 rule here. If an assignment is an option, use it for profits of $10,000 or less. Over $10,000? double close (even if you have the option to assign), just to be on the safe side.
Why not double close all the time?
Here are the down sides to double closing.
- You typically need to put up a deposit on the A to B contract
- You have to pay a fee (typically 1%) for transactional funding
- You have to pay closing costs on the A to B transaction
(Check the “How to Close” category for details on closings, title insurance and closing costs)
*There are in fact some ways – clauses you can write into your contracts and legal loopholes that you can use to avoid paying these closing costs and reduce cost. There’s a bit to it so for now, I’m giving this information exclusively to my students and may create a public entry at a later date
With that, I’ll leave you with a story:
My mentor tells a story of a student he had who had an $80,000 profit on a wholesale deal. He advised the student to double close so as not to disclose the huge profit spread. The student insisted that he spoke to both the buyer and seller who were both happy with what they were getting, they both knew he was making a profit and assured him that they didn’t care how much he was going to make. As a result, the student opted to collect an assignment fee (his contract was assignable) in order to avoid paying closing costs (a few thousand bucks).
Long story short, the buyer wasn’t having any of it once he found out the student’s profit spread and renegotiated the deal down to a profit of only $20,000. Imagine losing $60,000 to save $4,000? Hell of a learning experience…
Takeaway here? learn from the pain of others whenever possible… in this case, use the $10k rule.
Now that you’re familiar with the two most common methods of closing on your wholesale deals, I want to talk about paperwork. It’s at this point I find that many of my students get stuck on how to fill out the actual paperwork.
I’m also including some FREE, downloadable contracts that are already filled in to be used as a reference guide when preparing your own contracts. And not to be outdone, I’m also revealing 35 little-known clauses that you can include in your contracts to save money, make more money, protect your profits, protect your legal interests, gain the upper hand in negotiations and more.
Any further questions? Need a title company? Need transactional funding? Drop me a comment below and I’ve got you covered.