myEmpirePROIf you’ve embarked on the exciting journey into the world of wholesaling and understanding the contracts for wholesaling real estate are on your mind, fear not.
We’re here to provide you with a comprehensive understanding of everything related to these contracts. Let’s unravel these mysteries and equip you with the knowledge you need to navigate this exciting venture.
But First, What is Wholesaling Real Estate All About?
Wholesaling real estate is essentially acting as the middle-person in a real estate transaction. It involves identifying undervalued properties, securing them under a real estate sales contract, and then transferring or assigning this contract to another buyer for a fee.
It’s a win-win-win scenario—a win for the original property seller, a win for you as the wholesaler, and a win for the end buyer.
Wholesaling real estate can be a win for the original property seller for 6 main reasons:
Reason 1 – Quick Sale: Wholesaling offers a speedy way to get rid of a property that has represented a headache for its owner.
The wholesaler typically finds a buyer quickly because they are often part of a network of investors actively looking for properties.
This swift transaction can be beneficial for sellers who want to sell their property promptly.
Reason 2 – Reduced Hassle: Wholesalers often handle administrative tasks and negotiations, taking the burden off the seller. Sellers may appreciate the simplicity of dealing with a single buyer (the wholesaler) rather than numerous potential buyers.
Reason 3 – Assured Sale: The wholesaler typically signs a contract that legally obligates them to purchase the property. This assurance provides a level of certainty to the original seller, knowing that the deal is likely to go through; in exchange for a price much lower than the fair market value.
Reason 4 – Avoiding Marketing Costs: Selling a property often involves marketing efforts, which can be expensive and time-consuming. When working with a wholesaler, sellers can bypass these marketing costs and efforts since the wholesaler is responsible for finding the end buyer.
Reason 5 – No Repairs or Improvements: Wholesalers usually purchase the property in its current condition, eliminating the need for the seller to invest time and money into repairs or renovations to make the property more attractive to buyers.
Reason 6 – Flexible Terms: Wholesalers may offer flexible terms and conditions to the seller, making the process more accommodating based on the seller’s needs and circumstances.
In essence, wholesaling real estate offers a streamlined, efficient, and convenient process for sellers, providing them with a viable option to sell their property swiftly without the challenges and uncertainties often associated with traditional selling methods. To make this possible, particular types of contracts are essential.
Contracts for Wholesaling Real Estate: The Essentials
Contracts play a pivotal role in wholesaling real estate, and there are two main types you need to be familiar with:
Contract Type 1 – Real Estate Sales Contract:
The Real Estate Sales Contract, often referred to as a purchase agreement or purchase and sale agreement, is the cornerstone of any real estate transaction, including wholesaling.
This contract represents the initial step in the wholesaling process, setting the entire deal into motion.
Contract Type 2 – Assignment Contract:
The Assignment Contract, also known as a purchase agreement addendum or assignment of contract, plays a pivotal role in real estate wholesaling.
It enables the wholesaler to transfer the rights and responsibilities of the original sales contract to another party, allowing for the potential assignment of the deal.
Once you have the contract type 1 in place, it’s time to seal the deal. There are two popular approaches:
Approach 1 – Assignment Closing:
The Assignment Closing approach is a streamlined and efficient method in real estate wholesaling. It involves the use of two key contracts: the original executed real estate sales contract and an assignment contract. Here’s a breakdown of how it works.
The wholesaler begins by securing a property under a real estate sales contract with the original seller. This contract establishes the terms and conditions of the purchase.
After securing the sales contract, the wholesaler identifies another buyer (assignee) who is interested in purchasing the property.
The wholesaler then enters into an assignment contract with the assignee. This contract transfers the equitable rights and obligations of the original sales contract to the new buyer, making them the new buyer under the terms agreed upon in the original contract.
In exchange for transferring the contract rights, the wholesaler receives an assignment fee from the assignee. This fee represents the wholesaler’s profit in the deal.
The deal is closed, and the property is transferred from the original seller to the new buyer. The wholesaler’s involvement ends at this point, and they walk away with the assignment fee.
This approach is popular for its simplicity and speed. It allows wholesalers to profit from a deal without the need for significant financial investment, making it an attractive option for those starting in real estate wholesaling.
The reflection in the closing statement, may lead to certain types of financing imposing a cap on the assignment fees, typically around $10,000 to $15,000. That can be avoided with approach number 2.
Approach 2 – Double Closing:
The Double Closing approach, although involving more paperwork and coordination, can potentially result in higher profits for the wholesaler. Here’s a detailed look at how it operates:
The wholesaler signs an assignable contract (i.e has an assignment clause) with the original seller (the property owner) just as in a typical real estate transaction. This contract establishes the terms and conditions of the purchase from the seller.
The wholesaler then enters into a separate sales contract with the end buyer. This contract outlines the terms of the sale between the wholesaler and the end buyer.
The closing for both contracts is coordinated to happen concurrently or within a short time-frame. This involves careful scheduling and coordination to ensure a smooth transition of ownership.
The wholesaler may fund the purchase from the original seller using their funds or a temporary transactional funding source.
The end buyer funds their purchase through their financing or other means.
Predatory lending laws could restrict the utilization of identical funds for both transactions, while mortgage regulations might bar an end buyer from financing a property transferred within the previous 6 months through a mortgage financing.
The wholesaler closes the purchase from the original seller, acquiring the property.
Using the proceeds from the end buyer, the wholesaler immediately resells the property in a subsequent closing to the end buyer at a higher price.
The difference between the purchase price from the original seller and the selling price to the end buyer represents the wholesaler’s profit minus closing costs.
This approach allows wholesalers to maximize their profit potential by capitalizing on the spread between the two transaction prices.
Although it involves more paperwork and potentially higher costs, it can lead to greater financial gains for the wholesaler.
Both approaches have their merits and are chosen based on the wholesaler’s financial capacity, risk tolerance, and overall strategy in the real estate wholesaling venture.
The Significance of an Assignable Real Estate Contract
The assignable real estate contract is a crucial tool in the wholesaling world. It secures your stake, or equitable interest, in a property until you find the right end buyer. It’s akin to having a reserved seat at the real estate table. With that being said:
The Contract Must-Haves: 9 Items to Check Off
When choosing sales contracts for wholesaling real estate, make sure to include these essential components:
- Party Names (Buyer and Seller): Clearly specify the involved parties to avoid any confusion.
- Assignment Clause: This is the linchpin that enables you to transfer the contract, enhancing the deal.
- Property Information: Provide detailed information about the property to ensure clarity for all parties involved.
- Purchase Price: Clearly state the agreed-upon purchase price, as it’s a critical aspect of the contract.
- Target Closing Date: Set a realistic closing date to establish a timeline for the transaction.
- Earnest Money Deposit (EMD): Demonstrate your commitment by including a deposit, showcasing your seriousness about the deal.
- Financing: Lay out the financing details to establish a clear financial framework.
- Contingencies: Address potential contingencies to ensure all bases are covered and reduce risks.
- Signatures of Both Parties: Ensure that the contract is legally binding by obtaining signatures from all involved parties.
The Importance of the Assignment Clause In Contract for Wholesaling Real Estate
The Assignment Clause is a pivotal element of the original sales contract that grants you the authority to transfer contract rights and responsibilities to the end buyer.
In conclusion, understanding contracts for wholesaling real estate is paramount to success in this industry. With the right contracts and knowledge, you can navigate the real estate market with confidence and skill.
Frequently Asked Questions
You’ll primarily use a real estate sales contract and an assignment contract or opt for a double closing with two real estate sales contracts.
Contracts can be crafted or obtained through legal and real estate professionals, online platforms, or even real estate investment clubs.
If you’re wholesaling, you’ll be sending the end buyer an assignment contract or a real estate sales contract, depending on your chosen closing approach.
You’ll use an assignment clause in the contract to indicate your intent to assign the contract to the end buyer, making it all official and smooth as silk.