Like some of you, I was once a novice in wholesale real estate, and I scavenged the Internet for all the information that I could find on it. Now, there are guides, like this one, to explain how wholesale real estate contracts work.
So, whether you are new to being a real estate wholesaler, researching it, or just checking if things have changed, check out the steps on how these transactions work.
What’s a Real Estate Wholesaler?
A real estate wholesaler is someone who makes a contractual agreement with a property seller to buy the property seller’s equity. The seller retains control and ownership of the physical property. Suppose the real estate wholesaler does not find an end buyer for the property. In that case, the property’s equity is automatically returned to the property owner upon expiration of the contract between the seller and the real estate wholesaler.
Ideally, the real estate wholesaler finds a buyer and assigns the contract with the seller to the end buyer. After the end buyer and seller agree to the contract terms, money is paid for the property, and the real estate wholesaler gets paid for the difference between the two contracts signed with the end buyer and seller.
What Contracts Are Needed to Wholesale Real Estate?
The first contract is the one between the real estate wholesaler and the property seller. This contract is called a Purchase and Sale Agreement. The contract outlines the terms and conditions that accompany the property’s sale, the price to be paid, the start and end date of the contract, and any contingency terms.
The second contract is the one between the real estate wholesaler and the buyer. This contract is called the Assignment of the Real Estate Purchase and Sale Agreement.
Real Estate Assignment
A real estate assignment allows a person to make money from selling property to an end buyer that was never owned by the person who sold it to the end buyer. This is a great way to enter the real estate market, learn about real estate, or become a real estate investor with little to no capital requirements.
The person assigning the real estate must simply find a buyer who will accept the seller’s terms and, hopefully, pay more for the seller’s property than the person assigning it agreed to pay the seller.
What Is an Assignment Contract In Real Estate?
When real estate wholesalers sign a Purchase and Sale Agreement with a property seller, they are contracting for control of the property’s equity. The contract gives them the exclusive right to sell the contract to an end buyer who will then be able to buy the seller’s property.
After a real estate wholesaler has found a cash buyer for the seller’s property, the contract is assigned to the end buyer. The assignment gives the end buyer the right to purchase the property’s equity, provided the end buyer and seller can agree on all the other contract terms.
In essence, for a fee, the real estate wholesaler is selling the end buyer a piece of paper that gives the end buyer the right to buy the seller’s property. The assignment is not a guarantee that the end buyer and seller will agree to the transaction.
What Does Assigning A Property Mean?
Assigning a property means transferring the right to purchase the property’s equity to another person. Therefore, the contract holder has the right to buy the property.
Without the assignment of the contract, neither the end buyer nor any other buyer can purchase the seller’s property until the expiration of the contract between the property seller and the person who owns the exclusive right to purchase the property’s equity.
Ultimately, assigning a property means the end buyer can purchase the property. The person who assigns the property, the assignor, only gets paid for the assignment when the real estate transaction is completed – when the seller and buyer make a deal.
Rights and Obligations in A Wholesale Real Estate Contract
When assigning real estate, the assignor normally receives a deposit as a show of good faith from the end buyer. The assignor is responsible for disclosing the contract’s terms and conditions with the seller and information that must be legally disclosed to the end buyer.
The end buyer in a real estate assignment, the assignee, is usually a cash buyer who is buying the property “as is.” The end buyer will meet with the property seller and be allowed to conduct all the necessary property inspections, title and lien searches, and any other relevant legal investigations of the property and parties involved.
Two Ways to Become A Real Estate Wholesaler
There are two ways to become a real estate wholesaler.
Find a Seller, Then a Buyer
The first way is to find a seller and then look for an end buyer. Although it may not be preferred, it may be the best option for people with no real estate contacts, money, or buyers. In this scenario, you find people who want to sell their property and persuade them to give you the exclusive right to sell it for them for a limited period. After you have a contract with the seller, you find a buyer with the money and interest to purchase the property. Ideally, there is a significant margin between the seller’s asking price and your buyer’s offer. The difference between the selling price and the end buyer’s offer is your payment for putting the deal together.
Find a Buyer, Then a Seller
The second method is to find a buyer first and then find a seller. Many people prefer the second method because then you know you have a cash buyer interested in acquiring property. You also know which kinds of property your buyer wants to buy, so you can focus exclusively on those properties. In this case, the real estate wholesaler still must try to persuade the property seller to sell for as low a price as possible. They must then try to push the buyer’s offer up as much as possible to max out the difference between the buyer’s offer and the seller’s price.
Getting Started as A Real Estate Wholesaler
When looking for properties to represent as a real estate wholesaler, you should look for properties with sellers looking to unload their property and may need help doing it.
The kinds of property that you should target are:
- Properties that must be sold
- Estate sales
- Bank foreclosure sales
- Property being sold “as is”
- Distressed properties
- Properties with motivated sellers
Where to Find Wholesale Properties
The properties that you want can be found online on craigslist and FSBO. You can also form very profitable relationships with real estate agents, property appraisers, and property inspectors and ask them to let you know if they learn about any properties that might be of interest to you or property sellers who might want your assistance.
For those willing to spend some cash on marketing and finding properties, you can also hire property finders, bandit signs, direct mailing, and court records for people who have recently inherited property and those who are behind on their mortgage and/or tax payments.
Where to Find Buyers
Buyers can be found at networking events, online at Zillow and craigslist, by distributing flyers in target neighborhoods and emailing investors you met at networking events.
You can also find potential investors and good connections in real estate investment groups, real estate wholesale groups, and real estate investor support groups. These groups are also great for meeting and networking with property appraisers, real estate agents, title companies, mentors, contractors, leads, and partners.
Real Estate Contract Contents
There are different kinds of real estate contracts, and you should draft or buy one that complies with the laws in your area and suits your purposes. In general, real estate contracts have the following information:
- Parties involved
- Description of the real property
- Personal property included
- Purchase price and financing
- Where deposits will be held
- Financial contingency plan
- Inspection contingency plan
- Lead-based paint disclosure
- Closing date deadline
- Deed type
- Listing state-specific adjustments (e.g., taxes, water, sewage)
- Buyers’ default clause
- Seller’s default clause
- Statement of risk and loss damage
- Disclosures and addenda
- Provision for security if the sale doesn’t happen because there is no clear title or buyer can’t get title insurance
Pros and Cons of Real Estate Wholesale Assignment Contracts
Real estate wholesaling isn’t just about contracts, real estate lingo, and attending networking meetings. Hopefully, you will enjoy it too!
Still, you should know the obvious good and bad things about it.
The Good About Wholesaling Real Estate
You don’t need a real estate license or money to do this. There are no credit checks required, so even if you have been down on your luck, you can still do this. Also, doing this will help you to learn about real estate quickly while turning quick profits.
The Bad About Wholesaling Real Estate
Your income is unpredictable; building up your buyers’ network and other important relationships takes time; and, it can be really hard to find distressed properties.