What is a double closing?
A double close involves purchasing a property wholesale and then “flipping” the property to an investor that same day; thus the double closing -- the wholesaler's closing is nearly simultaneous with the end buyer's closing. You only hold the title for a quick minute!
When deciding whether or not it is lucrative to do a double closing, there are multiple factors that come into play.
There are 3 key questions that can help inform your decision on whether or not to double close.
- What are the costs to double close?
According to the laws of your state, your location can vary the costs associated with double closing a deal. The major costs determined by location are:
- Title fees
- Insurance policy
Title fees vary from state to state. I know wholesalers that have transferred titles for as little as $150 but that can go up into the thousands. As the costs rise you have to take into account, is double closing worth it?
2. Whose money am I using?
Do I have to bring my money to the table or can I use transactional funding? Best case scenario you can bring your buyer’s funds to the table to buy your contract and close the second one using the difference. In that case we use the buyer’s money to close the front end transaction and then close the second one we are selling to the end buyer.
In a recent double closing deal I did, I lent my money to the company and I only charged a half percent to use my money. That half percent interest, or any interest charged if a company is not using their own money, is a cost to consider when making the deal. Despite the higher cost for us and the need to borrow money outside of the company (my personal finances), my company thought it made sense to double close it because the buyer was a little skittish and there was a risk of losing the deal.
If you don’t have to borrow money and can use the buyer’s money, the price goes down significantly.
3. What is the issue you are trying to avoid?
Are you trying to avoid the buyer balking at the assignment fee, or are you trying to avoid the seller seeing how much you are making?
Generally it comes down to having concern about the buyer or seller seeing how much you are making on the deal. Many people don’t want the buyer to know how much they are making on the deal. Say we are buying for $220,000 and selling for $250,000 and I don’t want the buyer to see that we are making 30,000 on the deal.
You have to ask yourself, Is that really an issue? Does the buyer really care? The buyer isn’t going to see what you make until they are at the closing table. If you have required a non-refundable deposit of say $5,000 are they really going to balk on that deal and lose $5,000?
Typically the buyer actually isn’t the issue, it’s the seller. Psychologically it seems to make more of an impact on the seller when they see that you are making $30,000 on an instant title handover. There are ways to get around this in how you construct the contracts and transparency of the assignment fee.
There are different ways to get around this.
We primarily use two methods: how we structure our contracts, and the transparency of the assignment fee.
Typically the seller doesn’t even look at the assignment fee because it is on the buyer’s side of the closing. You can ensure this by working with a title company or attorney to split the HUDs. I personally do this as much as possible. So the buyer only sees the buyer side and the assignment fee, and the seller only sees the seller side. We call this a blind HUD. Now I only have to worry about the buyer balking at the assignment fee.
I personally don’t have a set amount I need to make to decide to double close. I make a decision based on the cost benefit to risk analysis using all the factors discussed here.
I also don’t default towards double closing deals. I push my team to assign contracts whenever possible because:
1. It's cheaper, we will net more money on that transaction
2. It’s better on our taxes.
When you get into the burden of having multiple HUDs for buying and selling properties, fees etc. it becomes a challenge come tax season. We do almost 200 deals a year and if I can assign all of those it becomes so much easier. It’s just a commission line.
There is risk that comes with double closing a deal. What happens if I close on the property and the buyer doesn’t close? I now own that property and the problems that inherently come with that. Because of the risk factor, I tend to assign contracts more frequently.
It generally costs me between $500 -$600 and $2,000 to assign. It can be up to $7,000 to close a deal today where you make $50,000. Is that ideal? No, but if you are risking not closing the deal, you sometimes make the choice based on your risk to cost benefit.
Think of all the above factors when deciding to double close and then make the best decision for your company and to close on the deal.
I find that decisions around double closing often come down to mindset.
If you are worried about the buyers, put yourself in their shoes as a cash buyer. I buy a lot of properties and I see the assignment fee. I usually think ‘wow good for them, or ‘I could have gotten a bit of a better deal on this’ but I don’t walk away from the deal. I said that I would buy it for that amount and I am good on my word. Make sure you are dealing with cash buyers. Actual cash buyers don’t care. They are here to forward their business profit and understand that you are as well.
Remind yourself, you are providing a service.
If they are working with you as cash buyers, they should love that you are making money on the deal and they can continue to work with you in the future.