Working with investors we are often asked “which is better, to do an assignment or to do a double escrow?” My answer is always the same “I’m a capitalist, I make more money on a double escrow.” (Because we receive fees twice). But the choice is completely up to you and the advisement of your attorney and CPA. This article is not meant to convey legal advice but to simply explain the differences and similarities of the two.
Both an assignment and a double escrow are ways to wholesale a property. “Wholesaling” is a term used for an investor that is not the ultimate buyer, they either receive an assignment fee from assigning a purchase contract, or they make a profit by reselling the property through a double escrow. Typically the wholesaler does not uses their own money to acquire the property, although sometimes transactional funding is used to acquire the property for a brief period of time. For this article we will just call them an investor.
Let’s compare how a double escrow and an assignment are similar. Both are a means to make a profit on a property without having to make repairs and resell the property. Both require the investor to do some form of marketing for properties, whether direct mail, billboards, Craig’s list, bandit signs and even word of mouth, to bring in potential sellers. Both require the wholesaler or investor to sign a purchase contract with the current owner of the property. Both require the investor to secure a Buyer for the property (whether they are the end Buyer is not known as this Buyer could also assign the purchase contract with an assignment, or do their own double escrow). This is pretty much where the similarities end.
Now let’s compare how a double escrow and an assignment agreement are different. With a double escrow two separate files are opened. The first file being the “acquisition” file and the second being the “resale” file, or more commonly known as the “AB” file and the “B-C” file. As mentioned earlier, fees are paid twice as there are two files, two purchase contracts and two title commitments are generated. The purchase contract for each file determines who pays the title and escrow fees in each file. Sometimes the investor will pay the fees in both files depending on how the contracts are written, or other times only in one file.
With Doubles and Assignments the investor taxed differently as well. With an Assignment, the investor (or Assignor) receives an assignment fee for the rights to the purchase contract. This fee is taxed by a 1099 MISC form and the fee is reported to the IRS. With a Double Escrow the investor actually goes into title on the A-B file so the taxation is based on the sale of real property using a 1099 S. Each 1099 form has different tax consequences depending on your tax bracket. Always discuss with your CPA which is better for your particular tax situation, a 1099 MISC or a 1099 S.
When deciding between an Assignment and a Double Escrow, always keep in mind that full disclosure is always the best practice. Some investors will even disclose to the property owner in their purchase contract that their intent is to secure a Buyer and then resell the property. Chicago Title’s company policy is to show the assignment fee listed on the settlement statement or to show the funds being transferred in and out of the A-B and B-C files.
If you have any questions on Double Escrows or Assignments please call or email us anytime, or contact your real estate attorney and/or CPA for legal and tax advice.
Written by: Amy Frink Branch Manager, Chicago Title Agency