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7 Stages Of A Double Closing Deal Involving 3 Parties
One of the wonders of flipping property is that a savvy investor can quickly make a tidy profit from a house with little capital.
It is a well-know strategy for hardcore flippers to buy up fixer-uppers at bargain prices, schedule it to undergo some remodeling works, and then sell it on to the next buy. Pocketing a tidy sum often in the region of $5,000 to $10,000 in the process.
The whole process might take anywhere between one to three months for experienced players. Sometimes even faster.
And as you start to get used to the adrenaline of doing such flips, you will undoubtedly start to explore types of flips that require even lesser capital and resources while banking in a higher return.
Option transactions is one such example where players secure an option to purchase a property. But instead of executing the option to purchase, they get an interested third party to purchase the option contract at a higher price.
The option is then assigned to the new owner and the flippers gets paid.
Sometimes a complete option flip does not happen the way the investor envisioned it. Often because of the option’s expiry deadline.
When this happens, and the flipper is convinced that the flip is going to be profitable, a double closing transaction is the next step.
For a flipper of real estate, the ideal transaction is of course to buy and sell the option-to-purchase because it comes with the less amount of work and requires the less amount of costs.
But when circumstances deny option flips from occurring, the next best thing is double closing transactions.
While both methods will help the slipper avoid the expenses of loan costs, a double closing transaction is different from option transactions in that the flipper is actually involved in closing when involved in the former.
You still don’t need to have a mortgage ready in the wings and don’t have to ponder over the down payment.
Here are the 7 stages of double closing.
1) Party A agrees to sell a house to Party B at below market price
The key element here is that the purchase price party B agreed with party A has to be below market price in order to profit from it as party C will eventually be the one buying at market price
Barring any extraordinary circumstances, the absence of this variable will make the whole double closing transaction look ridiculous and might even resemble a scam.
A sales agreement is issued.
2) Party B manages to sell the property to Party C at market price or above
The process of the back-to-back double closing transaction is now set in motion.
The gist of a deal that is structured this way is that the spread between the price agreed between party A and party B, and the price between party B and party C, will be the generated profits pocketed by party B.
It is akin to a trading business buying goods at wholesale price from a manufacturer and manages to sell it to consumers at retail price. The minor difference is that the payment made by the consumer will be split and paid to the manufacturer and the business respectively.
3) Party C secures financing for the property purchase
If you don’t already see it, party C will be the only party in the whole process to bring money onto the table.
It will most likely be a homeowner as investors will be unlikely to buy real estate at market price unless there is tremendous upside being forecast.
Whether party C secures funding via a mortgage loan from a traditional lender, creative financing, or private mortgage from private lenders, is not important.
The lender will then wire transfer the funds into the closing agent’s bank account.
4) Signing of deeds for transfer of title
At this point, party A will sign a deed to party B, and party B will sign a deed to party C for transfer of title to the respective parties.
To ensure that nobody is left holding the bag in such a complex real estate transaction, the deeds are not delivered but deposited into escrow with the closing agent.
This is a step in the process where the competence of the escrow officer will be critical to the success of the 3-way transaction.
At the same time, do be mindful that they have a lot on their plate too.
5) Financing is finalized and accepted by party C
This is when the funds are disbursed.
Assuming that the type of financing is a typical mortgage, the lender officially takes on the loan and the transaction on the lender’s side is complete.
The order is given to escrow to release the funds.
6) Funds are delivered
With the financier’s go-ahead given, the closing agent starts the process of releasing the money from party C’s loan to both parties.
Party A will receive the purchase price agreed upon with party B. While the difference or balance is delivered to party B.
Take note that closing costs and fees deducted directly from the funds might cause slight variances from the agreed figures.
7) Deeds are recorded
With the transaction complete and all 3 parties happy with the deal, the closing agent will then record both deeds at the country land records office.
Points to note
As there are 3 parties involved in the deal without including escrow officers and closing agents, there is every chance that they might not be able to schedule meetups where all 3 are present to sign and endorse documents.
In this case, it is legally possible for the closing to be consummated in escrow.
And if party C does not deliver the funds for the purchase, the deal is pretty much dead in the water.
And if the funds does come through, the funds the party B eventually receives are essentially net profit less service fees as he or she did not fork out any cash at all.
You can now probably see why double closing deals can be an attractive proposition for real estate investors.
Finally, do keep and eye out for expiry and execution dates for documents like option-to-purchase and sales agreements.
Letting these important dates lapse will give any individual party an easy excuse to back out of the deal.