Double closing
A double closing is the simultaneous purchase
and sale of a real estate property involving
three parties: the original seller, an investor
(middleman), and the final buyer.
The underlying reasons for having a double
closing vary. The most pressing and usual reason
is to allow the middleman to use the purchasers
funds to acquire the property from the original
seller. Another common reason for a double closing
is to conceal the identity of the purchaser
or seller.
Typically, a real estate investor first enters
into a contract to purchase a property and then
subsequently (before closing the purchase) enters
into a contract to sell the property (hopefully
for a higher price). The investor then utilizes
a double closing to close both transactions
at approximately the same time.
The Mechanics
The mechanics of a double closing vary, depending
on who the buyer and seller are, who is providing
the financing, and who is conducting the closing.
In the simplest form of double closing, the
purchaser would pay the purchase monies to the
middleman and they would complete a settlement
statement (HUD-1) for their transaction. The
purchaser would have to wait while the middleman
uses most of the purchase monies to purchase
the property from the seller. The seller and
middleman would also complete a separate settlement
statement for their transaction. The middleman
would then instruct the seller to deed the property
directly to the purchaser.
There are potential drawbacks to the use of
a double closing. In a state that collects a
transfer tax, the county clerk or auditor may
object to the fact that the original seller's
name is not on the purchaser's settlement statement.
The purchaser's lender may conduct their own
closings, and may object to being involved in
the transaction between the seller and middleman.
The purchaser or seller may disapprove of the
profit made by the middleman, or they may dislike
each other. The closing agent may object to
being paid for only one closing while having
to do extra work. Real estate agents may resent
that they did not get the highest possible price
for their seller. These and other hindrances
may require a middleman to be creative when
conducting a double closing.
To keep the purchaser and seller separate,
or to pacify a leery lender, the closing may
be conducted in two different rooms or at two
different times or locations. Success is more
likely if the closing agent is friendly and
accommodating.
To simplify the transaction, the middleman
may make one settlement statement directly between
the purchaser and seller and take his profit
as a line item on the settlement statement.
This line item is usually on the purchaser's
side of the statement as an assignment fee.
This may create a problem for the middleman,
as assignment fees may be taxed at a different
rate than short-term capital gains.
Legal Standpoint
From a legal standpoint, most sale contracts
stipulate that the seller may pay encumbrances
out of the proceeds of the sale. The fact that
the original seller still owns the property
is definitely an encumbrance. Also, most contracts
are assignable, thus the middleman always has
the right to assign his purchase contract to
the purchaser for a fee.
