Wholesaling Contracts: Everything You Need to Know
Wholesaling contracts are a way to get in the market of real estate investments. Real estate wholesaling doesn't require massive amounts of capital to get started and can provide wealth-building investments.4 min read
2. Wholesale Purchase and Sale Agreements
3. Finding a Motivated Seller
4. When is Wholesaling a Good Idea?
5. Potential Downsides to Wholesaling
6. Marketing Yourself as a Wholesaler
Updated June 28, 2020:
Wholesaling contracts are a way to get in the market of real estate investments. Real estate wholesaling doesn't require massive amounts of capital to get started and can provide wealth-building investments. The complexities of these real estate contracts are a deterrent for some investors. Even experienced real estate agents can struggle with understanding a wholesale contract.
How Wholesaling Works
It's important to gain a basic understanding of how wholesale contracts work. The idea is to purchase a property for a low price and assign it out for a higher price, thereby creating some profit.
The way wholesaling works is pretty simple:
- When investor A finds a property and signs a purchase agreement with the seller, they may have the option to assign the property to another person, investor B.
- If investor B is interested, they complete a simple "Assignment Agreement" document.
- It is a legal transfer between investors and removes liability from investor A.
- Investor B has taken over for investor A and is now allowed to purchase the property under the exact terms A negotiated for.
- Investor A is the middle man and earns his profit through an assignment fee.
As the middleman, your duties are to locate the deal and secure the rights, much like a real estate agent does, and then you assign the purchase contract to a real estate investor.
Wholesale Purchase and Sale Agreements
The basic legal framework of a wholesale contract sets forth a variety of terms including:
- Listing parties involved.
- Describing the real property.
- Denoting any personal property included in the sale.
- Details of the purchase price and financing options.
- Discussing financial terms and a contingency plan.
- Confirming the physical condition of the property at the time of transfer.
- Providing for a contingency plan due to failed inspection.
- Making the required lead paint disclosure.
- Establishing the closing date deadline.
- Discussing the deed type.
- Providing security if sale falls through due to inability to pass title or buyer can't get title insurance.
- Listing state-specific adjustments (taxes, water, sewage, etc.).
- Having both a buyer's and seller's default clause.
- Statement of risk and damage.
- Disclosures and addendums.
The buyer becomes the equitable owner although the seller retains bare legal title through the Doctrine of Equitable Conversion. Despite not having a title, you can control the property through the contract.
Finding a Motivated Seller
When you're attempting a wholesaling contract, the seller needs to know several things:
- You aren't buying the property yourself.
- Someone else will be buying it outright.
- You will maintain communication with the seller.
- If no suitable buyer is found, the contract will expire.
Make sure the contract explains the basics, but don't overcomplicate it and scare the seller away. In order for a wholesaling contract to be valid, your agreement with the seller must have the "assignment clause" inclusion. An example of an assignment statement would be "Buyer has unqualified ability to assign its rights under this contract to an outside third-party." Be sure to run all wholesaling contracts through a local attorney who is familiar with all the nuances of the particular location and any state and federal laws that apply.
You should know enough details about the property to complete a property prospectus report. This document details a variety of the property's features including:
- Property size.
- Legal description.
- Neighborhood comps.
You want to provide enough detail to show the investor the property is a great deal with lots of potential.
When is Wholesaling a Good Idea?
Like any investment strategy, there are pros and cons. There are times when wholesaling is a better alternative to purchasing outright including when:
- The property's true market value is unclear.
- There are potential problems you can't resolve.
- You have no money to invest yourself.
- The price still high, but there is some profit margin.
- The property is not local and presents liability concerns.
Potential Downsides to Wholesaling
Wholesaling has a number of benefits, but there are some potential downsides to be aware of including:
- Not being authorized to make improvements.
- Cannot offer seller financing.
- Buyer must pay all-cash.
- Illegality in some states to market a non-owned property.
- Being considered brokering real estate, which is illegal without a real estate license in some states.
- Some freedoms in "flipping" versus "wholesaling".
Marketing Yourself as a Wholesaler
To get your wholesaler business going, you need a wholesale buyers list. This is your marketing tool to let interested parties know what is currently available. The most common ways to generate leads are through social media, a website, marketing campaigns, and in-person networking.
If you need help with wholesaling contracts, you can post your legal need on UpCounsel's marketplace. UpCounsel only accepts the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.