Real estate wholesaling is when an individual, the “wholesaler,” acquires a contract from the seller of a property and assigns that same contract to an end buyer. The wholesaler does not purchase the property, and instead, the owner’s temporary contract allows them to sell it on their behalf. Wholesalers earn revenue through a wholesaling fee attached to the transaction — often a percentage of the overall property cost.
These properties are commonly distressed properties or off-market homes. The current owner no longer needs the property and is unwilling or unable to invest the time and effort required to prepare it for a typical sale. Instead, they pay a wholesaler to find end buyers for them.
End buyers are typically real estate rehabbers or other investors who prefer not to spend time identifying discounted properties or negotiating with sellers. By acting as the middleman, wholesalers generate income by helping real estate investors find and close potential deals.
A wholesale real estate contract between the seller and the wholesaler is required in this transaction. The wholesaler promises to sell the property for a specified minimum price within a specific timeframe. For example, a typical contract may state a wholesaler agrees to sell a property for $200,000 within 3 months.
After finalizing the contract, the wholesaler seeks a buyer. The wholesaler’s objective is to sell the property for a higher price than the contract stipulates. If a contract sets a property’s selling price at $200,000, the wholesaler should attempt to sell it for $225,000 instead. The “spread,” or the difference between the contract price and the selling price, is $25,000, which is profited by the wholesaler once the deal is closed.
There are two main methods used for closing a deal: the assignment of a contract discussed above and the double closing (also known as a double escrow). Let’s take a closer look at the two ways to close a wholesale deal.
Assigning The Contract
Assigning a contract is arguably the easiest way to wholesale real estate. As the name suggests, assigning a contract means that the wholesaler sells the contract, not the property itself. With a contract assignment, the wholesaler never personally purchases the property. Instead, they negotiate an option to purchase the property and the wholesaler turns it over to the buyer. The sale of the contract must occur before the agreed closing date. Subsequently, once the wholesaler assigns the contract for a subject property, an end buyer will assume the role of the buyer.
It is important to note that you must sign a contract to purchase a subject property during a wholesale deal. This is known as a purchase and sale agreement. Furthermore, make sure the contract does not prevent you from “assigning” or “selling the contract” to an end buyer. All contracts, by default, can be sold to another party (unless specifically stated otherwise within the contract).
The assignment of a contract does not mean you are actually selling the property, nor will your name go on the title. You are simply assigning your rights within the contract to purchase the home and sell the rights to the end buyer for a profit. When it comes time for the buyer to purchase the property, make sure they send the deposit to the title agent or attorney handling the closing. Once the transaction is completed, you are awarded a “finders fee” for acting as the “middleman.” Of course, this is contingent on the premise that every requirement is met in the purchase and sale agreement.
The Double Close
In some cases, a wholesaler may elect to conduct a double escrow, such as when the seller does not agree to an assignment of the contract clause or when it is not allowed by local regulations. Otherwise known as a “simultaneous close,” a double closing is an equally profitable real estate wholesaling strategy.
Essentially, the process of a double closing will witness the investor purchase the property and resell it at a later date. Depending on the particular scenario, the reselling of the subject property may happen on the same day it was purchased or even 60 days later. The main advantage of a double closing is that the wholesaler is able to keep their assignment fee confidential. Double closing appeal to the seller because it frees the seller from having to wait for the wholesaler to find a buyer. Additionally, both the seller and the buyer are able to maintain their anonymity.
During a double close, your company will enter into a chain of title and is therefore considered the true owner of the property for a short period of time. Accordingly, the transition of property ownership officially transfers from the seller to you (A-B transaction). It is then up to you to find a buyer who will purchase the property for more than you paid for it (B-C transaction). While the execution of a double closing is not much different from a regular purchase, wholesalers should make sure that their lender allows this type of transaction.
Wholesaling Real Estate
Let’s discuss a more in-depth example to familiarize yourself with the concept of real estate wholesaling. Assume there’s a homeowner intent on selling. However, the property is fairly distressed and therefore incapable of being sold for its true market value—if at all.
Instead of rehabbing the home themselves, the homeowner has another option: enter into a wholesale agreement with a subsequent investor. Whether the homeowner can’t afford to make the upgrades or they don’t want to, they can agree to enter into a wholesale contract with a wholesaler.
The contract will give the wholesaler the right to buy the property at a specified price (often lower than market value because of the work needed to rehab). The wholesaler will then find an end buyer willing to pay slightly more than the wholesaler’s original contract and sell their rights to buy the house to the new investor.
Example:
A homeowner wishes to unload a distressed property without investing in repairs. Also, the owner is ready to sell below FMV (fair market value).
A wholesaler enters into a contract with the homeowner and offers $120,000. The wholesaler then finds an investor from their buyer’s list who offers $140,000 for the property.
The investor takes over the contract by paying $20,000 to the wholesaler as the assignment fees.
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