Wholesale real estate is hailed as one of the best short term real estate investment strategies. It’s ideal for those just getting started in the real estate industry and looking to build their portfolio. That’s because it doesn’t require significant capital to get started, allowing you to acquire vital negotiation skills. As you develop your wholesale real estate portfolio, you might hear the term “double closing” get used. It’s a real estate practice preferred by many real estate agents in the wholesaling niche for its high revenue results.
Interested in learning more about double closing? Then look no further. Below, we’ll break down what double closing is and have you up to speed in no time!
What is Double Closing?
In the real estate industry, it’s also referred to as back-to-back closing. But no matter the name, this real estate tactic is defined as the simultaneous purchase and sale of a property. It takes three people to work: the original seller, an investor (or wholesaler), and the final buyer. It’s an exceptionally common practice in wholesale real estate, especially with end buyers like flippers and landlords. For those unfamiliar with it, wholesaling is a real estate investment process where a wholesaler acquires a contract from a seller and sells the same contract to an end buyer, making a profit for connecting the buyer with the property.
Double Closing takes its name from how it works. A real estate agent first enters into an agreement or contract to purchase a distressed property from the original seller. Before closing the deal on the sale, the agent enters into a contract to sell that same property to the final buyer — sometimes for a higher price. This results in the agent closing two deals simultaneously, hence the name “double close.”
There are many different scenarios and reasons for why a wholesaler would opt for the double close. The most common reason is that it allows the middleman (the wholesaler) to use the final buyer’s funds to purchase the original seller’s property. Another common reason is that it assists in hiding the identity of the purchaser or the original seller. If they’re say, a high-profile person or going through a difficult life situation like divorce, they may not want many people to know about the selling or buying of the distressed property.
How Does Double Closing Work?
As we mentioned in the previous section, wholesaling is a three-person party. A wholesale real estate deal is incredibly nuanced; there are many moving parts to it, and not every sale will go the same. Here is a breakdown of how a standard transaction operates.
Step 1: Find a Seller
Wholesale real estate agents, also called wholesalers, to locate a property for sale by the owner. These are properties that have been on the market for a while or are newly for sale. They have in common that the owner is a motivated seller, someone who is eager to get the property off of their hands. Because of this, the property often sells for under market value.
Step 2: Set a Fee
Next, the agent sets the wholesaling fee. This can be compared to a finder’s fee, meaning they get a cut of whatever the final buyer pays for the property. Some wholesalers charge a percentage of the transaction, as much as 3 or 6 percent. Others may opt for a set dollar amount, such as $1,000 or $10,000, depending on the property.
Step 3: Find a Buyer
You now need to find an end buyer for the property, someone who will ultimately own the property and take it off your hands. That end-buyer could be anyone from someone looking to convert the building into apartments, a flipper, or a traditional homebuyer with a family. If the seller’s transaction to the wholesaler is an A-to-B transaction, the second half would be a B-to-C transaction.
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Step 4: Allocate Funding
Of course, no deal can happen without funding. Because you, the wholesaler, actually purchase the property and its title, you need to be able to fund the deal, especially should it go south. There are several ways to acquire funding, including cash, borrowing from a traditional lender, transactional funding (flash cash), and single-source funding.
Step 5: Sell the Property
The agent sells the property to the end buyer and collects their finder’s fee.
It’s important to note, though, that because no property is the same, there may be other steps you may need to add to ensure that your transaction goes off without a hitch. Before you get too far into wholesaling, we highly recommend that you first become well versed in the different city and state regulations of the markets you operate in.
What Are the Benefits and Challenges to Double Closing?
Although double closing isn’t the only way to close deals, it tends to be the most popular, mostly because of its benefits; and there are many. But with benefits, there are also challenges that balance them. Here are a few advantages and challenges to choosing the double close method:
Benefits
Legality
Many have wondered if double closing is considered legal, and the answer is yes. It’s treated the same way as any other kind of close in the real estate industry since the agent is actually purchasing the property. A common misconception, though, is that you don’t require a license to do wholesale. If you’re going to be assigning contracts, then you most definitely need to be licensed. It’s necessary if you plan to receive money and broker real estate.
Of course, a crucial tip we offer is to make sure you check your city and or state’s laws to be sure wholesaling and double closing are legal in your neck of the woods. It’s better to be safe than sorry when practicing real estate.
Privacy
Another benefit is that, unlike traditional contract assignments, double closing allows for much more privacy. An investor’s net profit from the wholesale deal is often kept confidential from both the original seller and the final buyer because they are two separate deals. Because original sellers are sometimes desperate to sell a property, be it because they need to make quick money, the property needs a lot of work, or they’re struggling to sell it, they will sell the property for under market value. So, when the agent buys it from the owner and makes a deal with the end buyer, they can sell the property for a higher cost and net a higher profit.
Clean Paper Trail
Lastly, double closing allows you to avoid the legal, financial, and regulatory issues, aka red tape, that may crop up when agents try to assign the purchase agreement of a property they don’t own to a buyer. Because you’ve purchased the property outright and owned it (even for just a few minutes) before selling it in a separate transaction, there are fewer obstacles overall, and your intent remains true to what the purchase agreement says.
Challenges
Extra Work
The biggest challenge of double closing is that there’s more work involved for the wholesaler/investor than a traditional deal. You’ll be managing two separate real estate transactions instead of one, which is a lot to keep up with. That means two communication lines, coordinating two different schedules, double the paperwork, and having to handle the distribution of funds to two different parties. For some agents, this can be overwhelming, so it’s important to consider whether or not you can handle the workload.
Cost
Another challenge of double closing is the cost. This strategy can be more expensive than a traditional contract assignment because, as the wholesaler, you’re closing two transactions, not just one. You must be prepared to pay for the closing costs on both transactions: the buyer and seller side, so you must have proper funding allocated.
There’s Risk
Like with any real estate deal, there is always the chance that your buyer may back out on your deal. With wholesale real estate and double closing, the chance doubles. You can have everything lined up only for your seller, your buyer, or both back out on you, leaving you on the hook for the deal and the cost of the property. What’s worse is that sales falling through can negatively impact your reputation— even if you’re not to blame.
Call Motivated Sellers
As a real estate agent, finding a process that works best for your wholesale real estate business can mean a lot of tweaking and testing. We understand that it can be stressful, especially when it comes to vetting your leads and making sure they’re qualified leads. That’s where our team at Call Motivated Sellers comes in. We have a dedicated group of cold calling specialists who can take the burden of calling off your hands, or we can offer guidance if you have questions about your process.
Are you ready to work with us? Or maybe you’re interested in learning more about our services. Whatever the case, contact our team today, and let’s talk!