Insider’s Perspective: The Dirt on Double Dry Closing
At Enterprise Esquire, we’ve been getting a lot of questions about double dry closings after our last article about the practice in Illinois. You can check out the full article here.
In case you need a refresher, double dry closing is a real estate wholesaling practice in which a real estate deal closing is conducted both with “dry” funding (meaning, the purchase price of the property is not transferred until after closing is complete) and simultaneously with a second sale that funds the first (the “double” part). In brief, a double dry closing works like this
A wants to sell a property to B
Financing is not yet available to close that deal, but A-B decide to finalize the sale anyway, with the promise that funding is coming through very soon after closing
B turns around and sells the property to C
At closing, C pays B (either in cash or through a mortgage lender)
B takes the funds from C and pays back A, completing the original contract
For real estate investors, this can sound like a great deal. Flipping properties without putting up any capital? Sign me up! BUT, there are some very good reasons why double dry closings are not recommended and often don’t work in Illinois.
Because we’ve been getting so much interest in this topic, we decided to do a follow-up with a title company insider. We sat down with our title pals and really drilled deep into our frequently asked questions. Let’s do it!
1. What is the difference between “wet” and “dry” funding?
Wet funding is when the purchase price funds are ready to go at the time of closing. Whether a buyer is using cash or funds from a mortgage lender, when the money is ready at the time of closing, we call it “wet.” By contrast, “dry” funding is when the money just isn’t ready for some reason. This could be because of a procedural delay with the mortgage lender, a hold up with a different real estate transaction, or it can be by design, like in a double dry closing. It’s probably pretty clear from my description, but title companies, of course, prefer wet funding.
2. Why don’t title companies like double dry closings?
It’s not technically illegal to do a double dry closing in Illinois, but title companies just aren’t likely to insure title for this kind of deal. This is for a few reasons. One is, insurance is about predictability. A title company needs to know that it is dealing with a transaction that is likely to succeed. Without liquid funds ready to go during a real estate closing, we are not able to verify the likelihood that the sale will be successful. A second reason is turn-over. Like any other industry, the title insurance business likes efficiency. We like to start a task, complete it, and move on. Dry closings disrupt our rhythm when a one-hour closing drags on for a few hours or even a few days.
Another reason double dry closing is difficult for us here in Chicago is that, when there are two separate sales going on at once, there is a need for two separate deeds. In Chicago, each deed transfer requires a water certification. This is basically an application for a final water bill that, once paid, shows that all water and sewer charges for a particular property are paid in full. A water certification is required for all real estate transfers, and they cost money and time to obtain. This can present a logistical problem with double dry closings in Chicago.
3. What is the difference between assigning a contract and a double dry closing?
In the real estate investing space, you may also have heard the term “assigning” with regard to wholesaling properties. As we have discussed, a double dry closing is when a single buyer/seller finances the purchase of one property with the funds from the sale of another. Assigning a contract for sale is another matter. This is when, during a real estate transaction, the investor will put a contract on a property. Then, before buying it, he or she will assign the contract to the ultimate purchaser. This allows the wholesaler to make a little money in the interim, but he or she never actually closes on a property.
4. Why do so many real estate seminars highlight double dry closing if it’s not a viable option?
This is a tough one. I think honestly it’s because the idea of a double dry closing is so appealing. It sounds so doable, so it’s easy to get people excited about real estate investing. And those seminars bring in money for those companies, so they want the practice to sound as accessible as possible. In reality, they aren’t giving you their best or most honest and accurate advice.
5. Is there ever a situation in which a title company would agree to a double dry closing?
There’s only one situation I can think of, and I am not sure that every title company would agree to it. The only way that I can think of making this work is using “transactional funding.” Basically, this would be if the wholesaler/investor had enough cash to take the “dry” out of the double dry closing. It doesn’t matter too much if it’s the investor’s own cash or if he or she borrowed it. But at least then, the first closing could be completed with liquid funding, then the second transaction can close and repay either the investor or the lender. Of course, the challenge with this option is coming up with the cash for a transactional funding deal.
Reach out to Enterprise Esquire to Learn More
We hope this little behind-the-scenes look has been helpful for you! If you have questions about real estate investing, wholesaling, or the double dry closing phenomenon, feel free to reach out! At Enterprise Esquire, our passionate, experienced real estate attorney is always happy to talk things through. Click here to schedule an appointment and learn more about our real estate investor legal service packages!