Maybe you’re just getting started in real estate, or you want to collect an assignment fee, or you’re asking, “what is real estate wholesaling”… We want this to be your guide on everything you need to know about contracts in off market real estate investing.
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Keep reading below to get a complete guide on wholesaling contracts…
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What is wholesaling real estate contracts?
Every contract can be “assigned” to someone else unless the contract otherwise states it. And “wholesaling” a real estate contract means that you have a contractual agreement with a property owner to buy their property, and then you sell (or assign — also called “wholesale”), that contract to another person during the closing period.
Typically, this is a profession or a business, where someone or an entity, prospects for motivated sellers to agree on buying their property for cash, then the “contracted buyer” sells the contract to one of their cash buyers.
What a real estate wholesaling contract should include
Although, you SHOULD get advice from a licensed real estate attorney on contract law — and we are NOT licensed attorneys — however, for your entertainment purposes, here are our own company’s internal rules for a contract:
- Must be simple (1-2 pages) — we don’t want to scare sellers away with long legal jargon. We want to make it easy for a seller to say yes.
- Must have an exit clause — In our own off-market operations, we have inspections done professionally as to not be surprised. And sellers are ok with this. If neither of us knew that there were some serious termite issues that affects the structure then I have to have the ability to walk away or re-negotiate.
- Details of the transaction and parties involved — everything from price, terms, address, and parties’ contact info must be “spelled out” in detail.
- Must have an assignment clause — a stipulation/clause that allows to assign the contract to another party.
That’s really it for a simple real estate wholesaling contract.
If you’d like to learn more about what it takes to wholesaling real estate… read on 🙂
How to get paid – Assignment fee
The typical business model of “wholesaling”, gets paid on the assignment fee OR the double close. Here’s an example of how it works:
A.) You and a homeowner go into an agreement:
B.) You agree to buy their house for cash at a price of $100,000 (for example)
C.) You enter into escrow with this agreement
D.) You find a cash buyer to purchase the interest of that contract for $105,000.
E.) While in escrow you, transfer (or assign), that interest/contract, to him for that price.
F.) Escrow closes: The seller gets $100,000, and you get $5,000. The end cash buyer gets a house for $105,000.
How to wholesale real estate contracts
Although there’s a lot of controversy behind wholesaling real estate contracts, technically, assigning contracts is NOT illegal. There are two reasons why wholesaling has been “under the microscope”:
- People are running around “advertising” they don’t own … (In the typical definition of “real estate wholesaling”, you’re never “selling a property”, you’re selling your interest in a real estate contract. There’s a big difference. You should never say in your advertising that you have a property you’re selling — it should always be: “Assignment of contract”, or “I’m selling my interest in a real estate contract”.
- Wholesalers are giving themselves a bad rep … (If you’re telling a distressed homeowner that you WILL purchase their property for cash — and with complete confidence — that homeowner is relying on you to close. But if you fail because you can’t find a cash buyer or can’t secure private money or hard money lending, it spreads a very bad light on you and others who say “We’ll buy your house cash”. Because of recent “wholesalers” walking away from sellers, some States have been paying close attention to this, and making efforts to try and make the traditional business model of “wholesaling” illegal without a license.
Stay out of legal microscopes in wholesaling real estate contracts
Let me get this out of the way first: Each state is different, so we advise to always meet with a licensed real estate attorney of the state you plan on wholesaling in. We are not attorneys and only write for entertainment purposes…
Ok… so we got that legal jargon out of the way (but seriously don’t listen to us for legal advise, meet with an attorney). However here’s our opinion: No matter what state you’re in, it’s not illegal to “sell equitable interest” in a contract.
So two things to keep yourself out of legal waters:
- Don’t advertise that you’re selling a property
- Don’t walk away from sellers.
The last one is a big one. If you break your word and break the contract with a seller, they may pursue legal recourse. And if you’re in a state that doesn’t like wholesalers, they make take some serious action against you.
So how do you keep yourself safe from “walking away”?
Here are our suggestions:
How to wholesale real estate contracts and always CLOSE the deal
Reverse wholesaling
This is a strategy in real estate where you find a buyer FIRST before finding a deal.
Here are two videos from two wholesaling masters, that explain it:
The gist of it this:
If you build a solid relationship with a real cash buyer who’s been in the business long enough, he can actually TELL you what to put the house under contract for and what he’ll buy the contract for — all BEFORE you negotiate with the homeowner. This puts you in a great position of confidence, to know that the price you’re offering to the homeowner, will be bought
And here’s how another investor got started in REI by starting with “reverse wholesaling”:
Estimating costs and prices accurately
The biggest reason a wholesaler walks away from a deal is that they can’t find a cash buyer that will purchase their contract. And THE reason they won’t purchase that deal is that it’s not a good deal, and the price is too high.
If you’re not accurately estimating rehab costs and comping houses correctly, there’s a good chance you’ll be putting houses under contract for too high of a price; a price no one wants.
If this happens, you have two choices:
- Re-negotiate with the seller — Looks bad, but not as bad as the next one.
- Walk away — this happens all too often in real estate and gives wholesalers a bad name.
NOTE: if you’re re-negotiating because later, you find that the seller didn’t reveal that there are hidden roof damages that will cost you $20k… that’s different. It’s fair, legal, and ethical to ask to re-negotiate because you weren’t aware or told of certain damages/repairs/issues. However, some investors take this to the extreme and make up some excuse every time; when it would be far better for them to just learn how to comp and analyze deals better.
Here’s a video that shows you how to estimate repairs one of the biggest downfalls for new investors:
Here’s another video on comping houses so you get your ARV right:
After you’ve nailed the analysis part, presented your offer to your sellers, and asked for the close… the next part of “selling” your contract to collect an assignment fee
Building a buyers list.
Part of the “job” of a wholesaler is to grow and nurture their own list of cash buyers. That way, when they have a deal, they can blast an email (or call them directly if it’s a small list), and pitch the deal. Let’s talk about finding cash buyers for your wholesale deals…
There are a number of ways to grow a list:
- ) Go to REIA meetings
- ) Craigslist ads about your deals
- ) Mail private investors
- See this video on that:
- ) Go to Bigger Pockets
Marketing for wholesalers
I may have jumped the gun with all those contract jargon, and not first talk about one of the most important roles of a wholesaler:
MARKETING!
Without good marketing strategies, you can’t ever find motivated sellers to get your contract in front. So let’s finish off this article with some proven real estate marketing tactics:
- Real estate direct mail (High front-end cost. Very targeted. Very scalable— the bread and butter of many investors and our speciality at Ballpoint Marketing. It has a high front end cost, but as far as “cost per acquisition” it’s cheaper than cold calling, TV, and radio (at least our mail is cheaper 😉
- Pulling good data — Regardless if you’re cold calling, door knocking, or mailing, it pays to have good data. It can mean a skunked mailing or a great success. It’s best to learn about great mailing lists for real estate investors that are being used today. For example: Niche lists (senior w/ equity, bankruptcy, Expired MLS, etc), “stacked lists”, and absentee lists are always used because they work well.
- Cold calling (high effort, “free” if DIY, high front end cost if you scale, targeted — lots of wholesalers start off “smiling and dialing”. Cold calling is not fun for most. But if you do it yourself, it’s essentially free — but takes hours of your day if you want to do it right.
- Social media marketing tactics (“free”, not as effective, not targeted — Not many investors use social media, however, if you have a knack for it, it can be a good way to get (slow) steady flow of organic traffic once you get traction
- Door knocking (VERY targeted, very effective, not scalable — This is the best marketing tactic to get face-to-face with sellers. However, it takes lots of time. If you have no money but lots of time, door knock on potential sellers for hours a day (yes hours).
Summary
With the right contract and stipulation, the right ethics in wholesaling, and the right pricing strategy you can wholesale effectively while avoiding legal issues (just make sure you double-check with your attorney).
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