An Introduction to Wholesale Real Estate
Understanding Wholesale Real Estate
The basic idea of wholesale real estate is quite simple: quickly buy a property and then sell it to someone else. It can be thought of in much the same way as buying in bulk at the grocery store – it is just a quick moving of an asset from one party to another. As immobile and as significant as real estate is, it has some very unusual and interesting characteristics when it comes to buying and selling it.
So why would someone do this instead of just buying property in the normal way? Buying in bulk, as noted above, is attractive for the same reason that coupons and sales tax holidays attract customers to grocery stores. If an investor can arrange to purchase a property and resell it in a short time at a higher price, it doesn’t have to pay for the holding costs (mortgage, taxes, etc.). These holding costs are only lowered if the investor is able to resell the property at a profit.
The appeal of wholesaling has led to an increase in attention from investors looking for that quick profit. For new investors or those interested in getting into the business, this may seem like an appealing way to start building the resources necessary to purchase real estate normally. There are some good reasons for this: quicker capital, the ability to close on a property without a lender , the ability to renovate the property ahead of the resale, and the potential to increase profits through negotiation skills. However, regulating these types of transactions are fairly new (certainly in the context of the past century of real estate in which the U.S. has engaged). The long-standing (and strict) regulations around the mortgage process largely have no place here. Rather, they are novel transactions that must be handled with care, lest the often generous incentives to the investor be turned against him or her.
In addition, the grey areas of rules governing wholesaling can potentially lead to serious consequences for the investor. An investor who simply gets into this line of work without understanding all the regulations at play and best practices of the trade may expose himself to liability for fraudulent activity and limit his ability to continue working in real estate investing. This may be the result of buying distressed properties in areas that haven’t recovered from the real estate crisis. That said, the rewards of successful wholesaling can be great. With patience and a strict adherence to the proper rules, an investor could make a great deal of money. Effective wholesalers develop their own ways to identify deals and market the properties that they acquire, increasing their value as well as their profits.
What is a Wholesale Real Estate Contract?
Contracts are an integral part of any real estate transaction, but in the world of wholesale real estate, the purpose and nature of these contracts are significantly different from a traditional sale of a property. Most wholesalers are looking for distressed or under-valued homes that can be quickly resold for profit. Rather than purchasing a property to hold and resell, a wholesale deal is a method of quickly putting a home under contract and finding an investor buyer. These types of sales are typically not the best idea for homeowners who are looking to make a bigger profit on their homes, such as after a divorce or probate sale, but in situations where someone needs to sell quickly because of an emergency.
Broadly speaking, when thinking of contracts, for the sake of wholesale real estate contracts, you should think of them as providing protection to two different parties in the transaction: (1) the buyer, and (2) the seller. When you are dealing with an investment property, there are many reasons that a deal can go south, leaving all parties with unresolved issues.
In some cases, the buyer is a seller with a contractual obligation to buy again (a flip), in other instances the buyer is going to turn around and sell the property to a new investor after closing. While there are a lot of things that can cause a fall-through, a few of the most common issues are: Contractual agreements thus provide critical legal protection to your real estate transaction, from both the buyer’s and the seller’s perspective. A contractual agreement that spells out the exact expectations of both parties helps to set clear boundaries and keeps the deal moving forward in a positive way.
Elements of a Wholesale Real Estate Contract
The contractual landscape of wholesale real estate transactions is unique. There are specific components that you need to look for and include to make sure that your deal is enforceable.
An assignment clause is critical in a wholesale real estate contract. It’s the clause that allows you to sell the property to another buyer before you close on it and it’s the clause that explains how the equity of the property transfers to the end buyer.
Like the traditional real estate world, you have contingencies, or escape clauses, for your deal. You can have a contingency that gives you the right to back out of a deal if certain conditions aren’t met. You could have a home inspection contingency. Maybe you need to sell your existing home to buy the new one. Or even obtain financing in order to purchase the home.
There are many conditions that you can add to your wholesale real estate contract, and there is nothing saying that you can’t get creative or combine them.
The closing is arguably one of the most important components of a wholesale real estate contract. It’s the section that explains when the property changes title from the seller to the new buyer. In it, you should also stipulate how you’re going to utilize a "Simultaneous Closing" approach or the "Double Closing" approach. It’s also important to mention where the closing is taking place, and how the money will be transferred to the seller.
Drafting the Wholesale Contract
Drafting a wholesale real estate contract may seem straightforward, but it requires thorough attention to detail and an understanding of the legal framework involved. Below is a step-by-step guide to assist you in drafting a solid wholesale contract from the ground up:
- Choose a Template: Start with a generic real estate purchase and sale form. This form can be adapted for any other state. You can find templates from various sources online, or contact us to request a standard wholesale form.
- Identify the Parties: Under the section entitled Buyer or Purchaser, the primary purchaser (the wholesaler) will be listed, along with any contract assignees as additional buyers. Sellers will also be listed under the Seller or Seller’s Name section.
- Offer Price: In this field, insert the price that the wholesaler is paying the seller for the property. This should not be higher than the highest price of the demand for the property in the market. Then, in the following field, indicate what the retailer of the property will pay, listing the difference between buyers.
- Define the Property: Write a brief description of the object in question in the designated area. If possible, include a legal description in the property description section.
- Set Timelines: In the Performance of Contract Terms or Closing section, fill in the time the buyer and seller have to complete the process and the exact time of contract expiration.
- Contingencies: In the Contingencies section, note any conditions that must be met in order for the deal to be successful. Such conditions may include obtaining financing, an appraisal and inspection.
- Signatures: The final step in drafting a wholesale real estate contract is the signature of the buyer, seller, or their agents. You must sign before a witness. It is also advisable to have a lawyer review the document before signing to ensure that the conditions are enforceable.
Avoiding Key Mistakes
One way to avoid these pitfalls is to be cautious about the wording of your wholesale real estate contracts. Be precise but not overly exhaustive. Balance specificity with simplicity. For example, if you’re selling a home in "as is" condition, you should include that terminology. But you should refrain from adding a lengthy and detailed explanation of what "as is" means. That can muddy the waters. If someone tries to later argue that you unfairly took advantage of them, you might find it difficult to explain to a judge that they must interpret the phrase "as is." They might think you’re trying to be duplicitous. Another common mistake, especially for people who buy properties at auction, is to overestimate the value of the property. Make sure that the property has other value to you beyond just the sale price. If you’re bidding between two people over a hot piece of real estate, you may decide to jump up to $12,000. But is that property worth more than $12,000? If it’s a distressed property, is it worth more than $3,000? Often , it’s just a matter of creating a number and then sticking with it. Don’t let your emotions run away with you. If you need to take a break to strategize with a lawyer or an appraisal expert, then do it. Another common mistake is not taking the time to compare wholesale real estate contracts. Compare contracts to see what language makes the most sense. Also, study how different properties are being marketed. Are they highlighting features that you never thought about? Consider how to replicate that? Is there a value being assigned to that feature? Would it make more sense to leave it out? This knowledge can empower you and ensure that you’re making the best decision possible. Finally, get an experienced real estate lawyer on board from early on in your investment career. Ideally, you should have a lawyer evaluating your wholesale contracts from the very beginning. As you invest in more properties, you’ll develop the expertise to draft solid contracts. However, you’ll need the guidance of a lawyer throughout your first couple of deals to avoid contract pitfalls.
Legal Aspects and Compliance
In the pursuit of quick sales and fast profits, legal considerations might easily fall to the bottom of your list. But this would be a mistake. Whether you are new to wholesale real estate or not, it’s critical that you have a good grasp of the laws regulating contracts and real estate transactions. Dealing in the complicated realm of real estate begins with executing appropriate wholesale contracts. Gaps, grey areas, and liabilities in your contract may leave you vulnerable to litigation, or worse—an unhappy seller can make a simple wholesale deal evaporate. Here’s what you need to know:
State Regulations
Like all major businesses, real estate transactions are subject to an array of regulations governing the purchase, sale, and leasing of property—and these can vary widely by state and local jurisdiction. These include customary provisions and disclosures, while others may be specific to your location. Educate yourself as to which regs apply to your business model, whether it’s retail real estate brokerage, wholesaling, buying and flipping, buy-and-hold, or something else. Any reputable real estate website should provide access to current regulations in your area.
Disclosure Requirements
Many states mandate the disclosure, in writing, of information related to a property’s condition, including material defects, pests, necessary repairs, and safety issues. Disclosure laws vary from state to state, but typically require that a seller distribute a complete, detailed written description of a property to a buyer—including their presence at the time of the closing. Failure to comply with disclosure requirements can lead to legal proceedings.
Ethical Business Practices
Real estate is a "people business." Having a thorough understanding of the laws that govern the process minimizes the chances that a buyer or seller will feel swindled or confused—and improves your chances of a satisfied customer and a positive review, which is critical to your long-term success and ongoing reputation. It’s also crucial to communicate clear next steps and keep the lines of communication open between all parties.
Executing the Wholesale Contract Successfully
Successful contract execution is a crucial aspect of any successful wholesale real estate transaction. While the terms and conditions of a wholesale contract may seem straightforward, the process of seeing the contract through to completion can be especially challenging. To ensure that all the parties are satisfied by the conclusion of the contract, it’s important to know how to proceed with contract execution in an efficient and amicable fashion.
Once a contract has been agreed upon and signed by the seller, the terms must be followed unless a buyer decides to make changes, for example, in relation to the earnest money deposit. In this case, you’ll need to reach an agreement with the seller over each revision so that both parties are satisfied. Deliberate attempts to negotiate specific contract details or timing may lead to the sale falling through, along with the earnest money deposit.
Whilst you have the utmost responsibility to complete the deal as a wholesaler, it’s also your duty to communicate with the other parties involved. While much of this communication will take place with the seller, there will be plenty of instances when you must be in contact with investors, lenders, and contractors. Keeping a consistently open channel of communication with everyone involved will increase your chances of a smooth and successful transaction on every front.
If your wholesaling deal involves a real estate agent, it’s important to keep them updated and informed about your position throughout the progress of the transaction. Quite often, the closing date may be pushed back, which could interfere with your plans. By discussing the matter with all the key players and working out a new closing date together, you’ll ensure that there are no deal-killing surprises.
Once you’ve signed the wholesale contract, don’t sit idly by. Keep track of all necessary paperwork and the steps you have to follow in order to make it to closing. The aim should always be to complete the contract, so make sure that you and the other parties are doing everything you can to fulfill your respective duties and bring the deal to fruition.
Signing Off on the Deal
In this article, we have explored the world of wholesale real estate contracts. We have examined the various types of contracts used in wholesale real estate deals, including purchase agreements, assignment agreements, and double escrow agreements, and discussed the legal implications of each type of contract. We have also discussed the importance of conducting due diligence to ensure a successful wholesale real estate transaction.
Overall, wholesale real estate contracts are a powerful tool for real estate investors to acquire and wholesale properties quickly and efficiently . By understanding the legal implications of each type of contract and conducting proper due diligence, investors can minimize their risks and maximize their profits in wholesale deals.
If you are interested in pursuing wholesale real estate deals, it is essential that you seek legal advice and guidance from an experienced attorney who specializes in real estate law. An attorney can help you navigate the complexities of wholesale real estate contracts and ensure that your investments are protected.