in Real Estate Investing, Real Estate Wholesaling

What Is Real Estate Wholesaling & How Does it Works?

the-process-of-how-real-estate-wholesaling-works-explained

Last Updated on: 22nd January 2023, 02:15 pm

What is wholesaling?

It’s when you find a property that is in a distressed condition, then you get it under contract to buy within a specific period of time at a specific price that is below the market value to then sell for a higher price.

What does it mean to put the property under contract in real estate wholesaling?

Putting a property under contract in real estate wholesaling means promising to buy the property within the specific period of time that was agreed upon by the seller and the acting buyer (wholesaler).

But putting one’s property under a contract doesn’t mean closing the deal and making a profit yet. To do so, a wholesaler will need to find an actual buyer to sell the property at a much higher price.

Once the wholesaler found a buyer, they will then assign the contract to that buyer, and the buyer will take over the rights to purchase the property.

Let’s say you found a property at $100K, then you put it under a contract at that price. Then you found a cash buyer to resell that contract to at a higher price, eg. $110K. This leaves you with a $10K difference and that’s your profit.

Continuing on…

Do real estate wholesalers have to pay the seller the full amount right away?

Real estate wholesaler typically does not need to provide cash to the seller upfront. The goal of a wholesaler is to buy a property at a lower price and then sell it to another investor for a higher price. They do this by getting the property under contract and then finding a buyer who is willing to pay more. Once a buyer is found, the wholesaler will transfer the contract to the buyer through an “assignment contract” so that the buyer can purchase the property.

However, when a wholesaler gets a property under contract, they usually put down a small deposit to show they’re serious about buying it. This deposit is called an “earnest money deposit” and it’s usually a small percentage of the total purchase price. This deposit is held in a safe place (escrow) until the contract is finalized.

But even though the process may seem simple for a beginner like you perhaps, real estate wholesaling can actually come with a number of technical challenges and questions such as:

How to put a wholesale property under contract?

Once you’ve found a property you’re interested in and the seller has agreed to your offer, here’s what you’ll need to do to put a wholesale property under contract:

  1. Negotiate the initial deposit. It’s typical to have the deposit be less than 10% of the property’s value.
  2. Create a sale and purchase contract and make it assignable. Layout the terms of the sale and explain to the seller that you may need to transfer your rights to purchase the property to another buyer and that the contract should permit this.
  3. Have the seller’s attorney prepare and send the contract to your attorney. Prior to this, you should have already given them your attorney’s contact information for legal communication.
  4. Once you received the contract and signed it, your attorney will then send it back to the seller for them to sign. So, you’ll need to sign it first before they (the seller) do. By this time, you should already have sent the deposit as well.

What if the seller of the property that you want to wholesale doesn’t have an attorney?

If the seller of the property that you want to wholesale does not have an attorney, the contract process can still proceed. As the wholesaler, you can initiate the process by creating a purchase and sale agreement and assignment contract outlining the terms of the sale and the transfer of the property.

Expanding on that idea, let’s talk about…

What is a purchase and sale agreement in real estate wholesaling?

The purchase and sale agreement is an agreement between the wholesaler and the seller that outlines the terms of the purchase of the property, and this agreement typically includes the following details:

  1. Involved Parties: Parties involved in the sale and purchase agreement are the name of the buyer, which can be an individual or a company, and the name of the seller(s). This first part is where you make the contract to be transferable or assignable, allowing for the creation of another contract (called an assignment contract) that will be required when you, as a  buyer, decide to resell the property’s contract.
  2. Purchase price: The amount the buyer will pay for the property, broken down into two parts: the total purchase price and the “due at closing” amount, which is the remaining balance after subtracting the earnest money deposit.
  3. Earnest Money Deposit: Money given to show the buyer’s seriousness in buying the property, sent to a title company (escrow).
  4. Title details: Information about any liens or encumbrances on the property that must be cleared before the sale can be completed. The details that will be layout in this part will determine whether or not there were prior issues with the property.
  5. Property Description: Details about the property, including its address, square footage, and features or amenities.
  6. Property Condition: Information about the condition of the property.
  7. Closing date: The date on which the sale will be completed and the property will be transferred to the buyer, including which title company is being used or will be used to carry out the transfer of the property.
  8. Contingencies: Conditions that must be met before the sale can be completed, such as obtaining financing or passing an inspection.
  9. Closing costs: A breakdown of the costs that the buyer and seller will be responsible for paying at closing, such as title insurance, appraisal fees, taxes, and real estate agent commissions.
  10. Other terms: Any other important terms or conditions that the buyer and seller have agreed to in relation to the sale, payment plans, and warranties.

Let’s not forget about…

What is an assignment contract in real estate wholesaling?

The assignment contract is a contract between the wholesaler and the end buyer and outlines the terms of the assignment or transfer of the property rights. Assignment contract typically includes the following details:

  1. Assignor and assignee details: Information about the parties involved in the assignment, including the names, addresses, and contact information of the wholesaler (assignor) and the end buyer (assignee) that is purchasing the home.
  2. Assignment fee: The amount of money the end buyer will pay to the wholesaler for the assignment of the rights to the property. This amount is the amount you put on top of what amount you got the property under contract for. In short, this will be your markup profit.
  3. Property Description: A detailed description of the property being assigned, including its address and any important features or amenities.
  4. Closing date: The date on which the assignment and the purchase of the property will be completed.
  5. Terms of the original contract: A copy of or a reference to the original purchase and sale agreement between the wholesaler and the seller, including the purchase price, closing date, and any contingencies that must be met. This basically means that everything that was originally agreed upon by the wholesaler and the seller in the first purchase agreement written in the purchase and sale agreement contract will all be taken over by the assignee (the end buyer).
  6. Other terms: Any other important terms or conditions that the parties have agreed to in relation to the assignment of the property.

Please note that these documents should be reviewed by your own attorney to ensure that it complies with all relevant laws and regulations.

 

Let’s dive deeper into the subject of…

Who do real estate wholesalers typically sell their contracts to?

A real estate wholesaler may sell their contracts to the following types of buyers:

  • Rehabbers (fix and flippers): These are investors who purchase properties that need repairs or renovations and fix them up to resell them for a higher price. Rehabbers will complete the repairs and renovations and then resell the property for a higher price. They make money off the difference between the purchase price and the resale price.
  • End Users: These are individuals or families who intend to live in the property as their primary residence. They do not intend to make money off the property but instead use it as a place to live.
  • Landlords: These are investors who purchase properties to rent out to tenants. They make money by collecting rent and may also make money off the appreciation of the property.
  • Other wholesalers: Some wholesalers may purchase deals from other wholesalers in order to make a profit through resale. They will typically look for another buyer to assign the contract or sell the property at a higher price than they bought it for. They make money off the difference between the purchase price and the resale price.

As we move forward, it’s crucial to answer…

How to close real estate wholesale deals?

There are two main ways to close a real estate wholesale deal, and they are:

  1. Assigning a Contact: This means transferring your wholesale contract rights agreed upon by you as a wholesaler and the seller to another party (cash buyer).
  2. Double Closing: The wholesaler is actually buying the property and then immediately selling it to the end buyer. Double Closing is done to keep the original purchase price of the property from being disclosed to the end buyer. This way the wholesaler can make a profit without the end buyer knowing how much the wholesaler actually paid the property for, which makes it possible for them to make a larger profit by marking up the price more.

But in this post, if it isn’t obvious, we’re only tackling the assigning of contracts, because let’s be real, not everyone has the funds to pull off a fancy “double closing” move.

What to look for when buying a property to resell as a wholesaler?

When searching for properties to wholesale, look for those that meet the following criteria:

1. In a distressed condition: This means properties that are outdated, the grass is overgrown, the house has mold, etc. Basically, a property that a homebuyer can’t move into yet. This way they can purchase it at a lower price and then resell it for a higher price. In short, they purchase the property in an “as-is” condition and then resell it to a rehabber or end buyer who will make the repairs.
2. Distressed Seller:  Property owners who are in distressed situations and are in need of immediate cash. Wholesalers look for this kind of seller because they are more likely to sell their property at a lower price.  Additionally, when an owner is in a distressed situation, they may be more motivated to sell the property and are more willing to sell their property quickly rather than waiting for a higher offer.

Examples of distressed situations are:

  • Foreclosures
  • Short sales
  • Inherited properties
  • Relocation
  • Divorce
  • Job Loss
  • Health issues
  • Death
  • Tired landlords
  • Properties with back taxes

These are all the details we can provide right now, we’ll update this post accordingly.
Hope this helps,
N.G,