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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.
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