Double Closings: the Do's and Don'ts

The term "double closing" refers to the process of buying and re-selling a property on the same day or date. Double closings were given a bad name in 2004-5 when dishonest investors committed mortgage fraud.

Their scam worked this way: They'd buy a property, work with a dishonest appraiser or bank officer and get an inflated price. Then, they'd "flip" (re-sell) the property for an equally inflated profit. Guess who got hurt? The consumer, of course.

In fact, double closings are perfectly legal at this point in time; it's the misuse of them that is illegal.

Here's how the process of double closing generally works: Assume you're the initiator of a double closing. This makes you the "middleman." As an investor, your goal is to make a good profit without using any of your own money. So you:

Make two back-to-back closings (often in separate rooms) on the same day or date.

Use the proceeds from the second closing to fund the first one.

Do both closings in escrow so you can buy and resell the property for a profit without using any of your own money.

Make a profit because you buy the property below-market and resell it for a higher market price.

As with any real estate process, double closings have their advantages and disadvantages for you as an investor.

Advantages of Double Closings

Beyond the profit mentioned above, double closings allow you to avoid financing requirements because you can move your money quickly from one account to another. Also, you never expose the contract so you can keep the purchase price a secret from competitors and others. Finally, if last-minute hitches threaten the deal, you can back out of it with a "reverse assignment." With a reverse assignment, you assign your contract with the end'buyer back to the owner and charge a "consideration" fee; i.e., the profit you would have made if the deal had gone through.

As a shrewd investor, you should document the consideration in writing and secure it by a lien on the owner's property. The consideration should be paid to you at closing.

Disadvantages of Double Closings

Double closings do have their downsides, including the following:

You assume more risk. If the deal collapses, you get nothing.

It can be stressful getting everyone and everything together for a double closing. You may feel like you're herding cats; i.e., everyone wants to go a different direction.

Some lenders simply will not do double closings due to the bad press they received. It'll be up to you to find lenders who will participate in the process.

You may not be able to buy a property cheap and resell it quickly due to "seasoning" requirements on the seller's ownership. In this case, if the seller hasn't owned the property for a minimum of six months, the lender may assume that the deal is suspect and refuse to fund the buyer's loan.

HA regulations prohibit the funding of a purchase where the seller hasn't owned the property for at least 90 days. There are no exceptions.

Do's and Don'ts

Don't go into double closings unprepared. Do be prepared to "herd cats" every step of the way! More than most deals, double closings require close attention to detail on your part. Such closings are as much about people management as they are about financial management.

Jack Sternberg