Wholesaling is an excellent entry into the profession of real estate investing. It offers powerful wealth-building benefits and does not require significant capital to get started. However, the conundrum for many investors is the intricacies of the wholesale real estate contract.
This is especially true if you’re new to the investing business and unfamiliar with many of the contracts and legal forms required. Even real estate agents, dipping their toes into investing for the first time, can find the wholesale contract a bit of a challenge.
Because there are numerous misconceptions about selling contracts and wholesaling in general, the following breaks down the in’s and out’s of a wholesale real estate contract.
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What Is A Wholesale Real Estate Contract?
A real estate wholesale contract is a legal document between a real estate wholesaler and a seller, essentially giving the investor the right to buy the property. As a wholesaler, you are essentially setting up the game for others to play. Your job as the middleman is to locate a potential deal, secure the rights (much how a real estate agent would), and then assign the contract to a real estate investor. “A wholesale real estate contract is a legal document between a real estate wholesaler and a seller, which gives the investor the right to buy the property. Assignment contract is the transfer of rights from the wholesaler to the buyer”, says Rasti Nikolic, a financial consultant at Loan Advisor. The concept of a wholesale is similar to a purchase agreement, but the mechanics are much different.
It is also worth noting that a wholesale real estate contract may be carried out in reverse order. Otherwise known as reverse wholesaling, this process will have the investor seek a buyer before even having a property lined up. In doing so, the investor will already have a buyer lined up the second they initiate a wholesale contract. Additionally, seeking out the buyer first will give the investor an idea of what type of deal to look for. The primary benefit of conducting a wholesale real estate contract in reverse ultimately has to do with efficiency. If, for nothing else, time is the most valuable commodity of an investor, and having a buyer lined up will save them both time and money.
To better understand how a real estate wholesale contract works, wholesalers will need to first familiarize themselves with the basics of a purchase and sale agreement. The framework of this legal agreement, which provides the right to buy and sell a property, will include—but isn’t limited to—the following:
Wholesale Real Estate Assignment Contract
When you sign a wholesale real estate contract to purchase a property from a seller, you now have an equitable interest in the property. Under what is known as the doctrine of equitable conversion, a buyer can become the equitable owner of the property. At the same time, the seller maintains the bare legal title to the property under the terms of the agreement.
Although you won’t have the title to the property, you’ll be able to control it using a contract. On that note, it’s important to mention that every state and county will have its own laws on wholesaling and the formalities of the real estate wholesale contract.
The next step will then be to assign your contractual rights to an investor, which will require an Assignment of Real Estate Purchase and Sale Agreement. This contractual document will basically state the new buyer is assuming your responsibilities, including purchasing the property to the agreed-upon terms in the purchase and sale agreement.
It is vitally important the new buyer is informed of the original contract’s stipulations and layout, agreeing to all prices, terms, conditions, and contingencies. That’s why wholesalers should attach a copy of the purchase and sale agreement to the Assignment of Real Estate Purchase and Sale Agreement. This will ensure the new buyer is aware of the original sales agreement and has a copy that discloses all addenda made in the deal.
As part of a real estate wholesale contract, wholesalers will collect a profit for their work. The terms of how they get paid will be included in the Assignment of Real Estate Purchase and Sale Agreement. Generally speaking, wholesalers are typically paid a deposit when the Assignment of Real Estate Purchase and Sale Agreement is signed; the rest of the profit comes after the transaction closes. As a reminder, it’s best to have an attorney review the documents and contracts to ensure they’re correctly written for what you’re trying to accomplish.
Pros Of Wholesale Real Estate Assignment Contracts
Several benefits come with assignment contracts for wholesaling real estate. From turning quick profits to learning about the real estate market quickly, here are a few of the advantages of wholesale real estate contracts to keep in mind:
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Easily turn quick profits: Wholesale real estate contracts are able to make you profits within 30 days or less. Commonly, savvy wholesalers close around 5 – 10 deals per month. Once you have the experience of finding motivated sellers and building a buyers list, you will be able to repeat the process and turn these kinds of profits yourself.
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No credit check requirement: Even with bad credit, you will still be able to wholesale real estate. Since wholesalers are assigning the contract to another buyer, they do not have to go through a credit check. Only the buyer will have to go through credit checks to fund the property.
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Learn about real estate investing quickly: While wholesaling may sound intimidating for beginner investors, it is the perfect opportunity to learn quickly learn the ins and outs of the real estate market. Wholesaling is a combination of real estate transactions and will teach you many skills you will be using later in your investment career. These skills include legal documentation, calculating ARV, negotiating, marketing, and much more.
Cons Of Wholesale Real Estate Assignment Contracts
Now that we’ve covered the several advantages of wholesale real estate contracts, it is equally important to note the disadvantages they may have before you dive in. Some of the cons of a wholesale real estate assignment contract include:
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No guaranteed income: While wholesaling is a great way to earn profits quickly, steady income is not guaranteed. Once you find a distressed property, it may take some time to find a buyer. As a wholesaler, you are constantly trying to find the best deal for all parties involved, and the best option may not come to you overnight.
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Building a buyers list take time: As one of the key components to wholesaling, building a dependable buyers list may take an ample amount of time. You will want a sizable list of potential buyers before offering anything to the seller. In doing this, you reduce the risk of not making a sale at all. A common practice for wholesalers is working with repeat buyers who have been known to reliably make deals in the past.
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It can be hard finding distressed properties: Wholesaling often requires you to find distressed properties outside your local market. Unfortunately, there is no way to automate this process, and the research will have to be done yourself. You may have to find distressed properties through newspapers or by driving around neighborhoods to find unkept homes. Other strategies include direct mail and social media marketing campaigns.
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Wholesale Real Estate Contract Template: The Purchase Agreement
In order to make sure that all parties are clear on the specificities of a given contract, the agreement must be as direct and informative as possible. Luckily, this process can be streamlined with the help of a template. While the following is not a downloadable wholesale real estate contract pdf, it can serve as a detailed outline for investors. Use the template below as you get started, and do not be afraid to add more information as you go along. When it comes to real estate wholesaling contracts, the more informative and clear the better. Here is a wholesale contract template to get started:
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Parties involved: The names of both buyer(s) and seller(s), including signatures from all parties listed on the title.
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Description of real estate: The property’s address, legal description and property type.
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Personal property included in the sale price: Anything not attached to the building or the land. In most cases, this will include home fixtures.
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Purchase price and financing: The purchase price, deposits and financing terms.
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Where deposits are held: Outlines the manner in which deposits are held.
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Financing contingency: Outlines the financial terms or if paying by cash.
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Conditions of premises: Highlights the physical condition of the property that will be presented to the buyer.
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Inspection contingencies: If the property does not meet the standards of a buyer, as listed from the conditions of premises, this will allow for an inspection period to occur (typically 14 days), in which point the buyer can back out.
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Statement regarding lead-based paint: Disclosure related to lead-based paint.
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Occupancy, possession and closing date: Establishes a deadline for the closing date.
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Deed type: Confirms the type of deed to be conveyed.
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Marketable title: If the seller is unable to pass title or the buyer is unable to obtain title insurance, this option will reject the purchase and return the deposit.
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Adjustments: This will vary by state, but typically includes modifications for taxes, water, sewage and other charges.
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Buyer’s default clause: This outlines the rights of the seller if the buyer defaults on the agreed upon terms of the contract.
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Seller’s default clause: This outlines the rights of the buyer if the seller defaults on the agreed upon terms of the contract.
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Risk of loss and damage: Protects the buyer in case of damage to the property while under contract.
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Addenda: Common disclosures and addenda of the contract.
Real Estate Wholesaling Contracts & Marketing
The one thing every wholesaler will need to begin considering is a wholesale buyers list. Success in wholesale only works if you have investors in place to call upon. Therefore, a wholesale buyers list with ample prospects will serve as an invaluable tool.
Everyone you come across is a lead. Whether it’s through casual conversation at a coffee shop or dedicated real estate networking events, the people you interact with have potential to become a customer. In order to go from interacting with people to incorporating them into your business dealings, and eventually into a sale, it takes marketing. A wholesale buyers list acts as your audience; give them what they want. When adding to your bank of prospects, it’s important that you take down information on your lead, which will typically include:
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Buyer’s First & Last Name
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Phone Number
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Email Address
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Buying Criteria
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Type Of Funding
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Personal Information
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Source Of Referral
Generating Wholesale Leads
Once you have the basic information on your contacts, it will then be time for the real estate lead generation campaign to begin. The three most common types of lead generation outlets are networking, marketing campaigns, and social media/web presence. For those looking to get started, the following breaks down each marketing strategy for generating wholesale leads:
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Networking: One of the cornerstones of real estate investing is networking. This process of meeting contacts with the thought of working together down the road has fueled the industry for years. Although it may appear like a slow process when starting out, real estate networking can significantly improve an investor’s results.
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Marketing Campaigns: A real estate marketing campaign aims to get both your message and word on your business out to the public. In most cases, a marketing campaign will consist of tools like email, direct mail, and even business cards to reach your target audience.
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Social Media: Online marketing has the power to pull the shades back on you and your business and expose your brand to millions of people. With access to such a vast and diverse audiences, the one outlet almost everyone uses is social media. Whether for business or pleasure, sites like Facebook, Twitter, and LinkedIn are home to billions of active users daily, a goldmine for wholesalers. Done right, social media has the ability to produce endless streams of leads to your wholesale buyers list.
Wholesaling vs. Flipping
Wholesaling and flipping houses are considered beginner-friendly investing strategies; however, flipping houses requires significantly more involvement. Flipping a house means buying a property, renovating it, and ultimately selling it for a higher price. This requires upfront capital to purchase and renovate a home. In contrast, wholesalers are not required to ever purchase property or cover costs associated with ownership.
The ownership element of flipping houses increases the level of risk associated with this strategy. Flippers can run into unexpected costs, for example, if the property is on the market longer than expected before selling. In this case, the increased risk does translate to increased reward as the profit margins of flipping houses are somewhat higher than wholesale deals. New investors have found luck with wholesaling and flipping houses; choosing the right strategy will be entirely up to you.
Real Estate Wholesaling Misconceptions
One of the most common misconceptions about wholesaling real estate is that you must obtain a real estate license to do so. You do not need to get a real estate license to become a wholesaler. Wholesalers make money by selling a property contract for more than they bought it for. Real estate agents sell a property, facilitate the entire sale, and receive a commission as a percentage of the purchase price.
Is Wholesaling Legal?
Yes, wholesaling is legal. That being said, wholesalers are required to disclose certain information when facilitating a deal. For example, wholesalers must mention that they do not own the actual property and instead own the right to purchase the property. If wholesalers do have a real estate license, they must disclose that information as well. Always check your state and local laws before wholesaling properties to ensure you are in line with legal requirements in your area.
Can You Wholesale Commercial Real Estate?
You can wholesale commercial real estate in theory, but in practice this investment strategy is rare. The reason for this is because there are additional regulations surrounding the purchase of commercial properties. This makes commercial wholesaling a somewhat different and more difficult process when compared to residential real estate. Many believe the process to be riskier overall. However, because this strategy is much less common investors who are able to get acquainted with the proper regulations will find less competition overall.
Can The Seller Back Out?
The seller can back out if the language of the contract specifies certain clauses that are not met. In these cases, the seller will have legal justification to back out of the contract and deal. This most commonly happens if the seller is unable to buy a new property to move into on time, or if they decide against selling the property at all. Again, these clauses would have to be included in the original contract so while they can be surprising to hear, they should not blind side you.
Summary
A wholesale real estate contract is the central component to an investor’s wholesaling strategy and the factor that plays the most significant role when looking to get paid.
So even if you’re not a complete wholesaling expert—and born with a legal mind—make sure to dot your I’s and cross your T’s to ensure this complicated, though powerful, form of investing doesn’t leave you in the dark.
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