What is Daisy Chaining in Real Estate? [and How To Daisy Chain]

What is Daisy Chaining in Real Estate?

The real estate industry has a language of its own, with terms that may seem like jargon to the uninitiated. One such term is 'daisy chaining', which has become increasingly popular within the real estate investing arena.

Daisy chain in real estate refers to a process where multiple real estate wholesalers are involved in a chain-like transaction, each hoping to profit from the same property. While daisy chains can be profitable, they can also be complex, potentially ethically fraught, and not always the safest course of action.

What is Daisy Chain in Real Estate?

The term 'daisy chain' originally stems from the literal chain of daisies that children create by threading the stems through each other. In real estate, a daisy chain occurs when a wholesaler signs a property under contract to sell it to another wholesaler, who then assigns the contract to another, and so on.

This chain occurs when a wholesaler, instead of selling the property directly to an end buyer, assigns the contract to another wholesaler for a higher price, each hoping to walk away with a profit.

It's essential to understand that a real estate wholesaler is in the business of finding under-priced real estate and putting it under contract. The wholesaler’s ultimate goal is not to own the property or buy it outright, but to flip it to an investor who will pay cash for it and close the deal quickly. These investors could be anyone looking to add to their real estate portfolio, such as a landlord or a house flipper.

Daisy chaining, or co-wholesaling as it's sometimes called, involves a series of such transactions. This chain can include multiple parties, referred to as wholesaler B, wholesaler C, etc., depending on how many are involved in the chain.

Dairy Chain vs Wholesale

To further understand daisy chaining in real estate, let's differentiate it from traditional wholesaling.

In a standard wholesale deal, a wholesaler contracts a distressed property from a seller at a discounted price. The goal of the wholesaler is to sell each discounted property to end buyers who will pay cash, usually real estate investors looking for rental properties or flip opportunities. The wholesaler never plans to own the property; instead, they earn their money by charging an assignment fee to the buyer.

Daisy chaining, however, involves an additional layer of complexity. Rather than selling the contract to an end buyer, the original wholesaler sells the contract to another wholesaler. This can continue through multiple wholesalers, each adding their markup to the sale price.

In essence, the difference between traditional wholesaling and daisy chaining is the number of parties involved. In wholesaling, there are usually just three: the seller, the wholesaler, and the buyer. In a daisy chain, multiple wholesalers are involved before the contract finally reaches the end buyer.

How Does Daisy Chain Work?

When a daisy chain in real estate begins, it occurs when a wholesaler signs a contract with a seller and then assigns that contract to another wholesaler. The next wholesaler then assigns that contract to another interested party, perhaps another wholesaler, or possibly an end buyer.

Each time the contract is assigned, the price increases slightly, allowing each wholesaler to make a small profit from the assignment fee.

The original contract between the seller and a wholesaler is an assignable contract, meaning it legally allows for this type of transfer.

The agreement generally includes a clause that allows the wholesaler to assign the contract to another party without informing the original seller, making it difficult for the seller to know how many parties are involved.

Potential Pitfalls of Daisy Chaining

While the prospect of making money in real estate through daisy chaining seems enticing, there are pitfalls to be aware of. Often, the property has already been sold by the time it reaches the end of the chain, causing confusion and mistrust among the parties involved.

1. Inflated Prices: With every transaction, a wholesaler adds an assignment fee to the contract price, causing the final sale price to inflate significantly. This can deter end buyers, making it difficult to close the deal.
2. Lack of Control: As the chain grows, the original wholesaler loses control over the deal. This can lead to communication breakdowns, causing confusion and potential mishandling of the transaction.
3. Ethical Concerns: Daisy chaining can be seen as unethical if parties involved are not transparent about their intentions. Sellers and buyers alike might feel deceived, damaging reputations and relationships.
4. Legal Issues: While wholesaling is legal in many places, daisy chaining can sometimes skirt the edges of the law, especially if conducted without a real estate license. It's important to understand your local laws and regulations before participating in daisy chain deals.
5. Deal Fallout: The longer the chain, the higher the chance of the deal falling apart. If one wholesaler fails to find a buyer, the entire chain can collapse, leaving everyone without a deal.

Additionally, as the chain lengthens, it can be challenging to find good, real people to keep the chain going. It can also inflate the sale price of the property. The longer the chain, the higher the property's final price because each wholesaler adds an assignment fee to the deal.

There's also the risk of a lack of transparency. The original seller may not be aware of the daisy chain and can feel deceived when they discover the deal's complexity and the number of wholesalers involved. This is why seasoned investors often advise against daisy chaining, citing it as an ethically dubious practice.

Benefits of Daisy Chaining

Although daisy chaining in real estate has its downsides, when done correctly and ethically, it offers several attractive benefits:

1. Profit Potential: If managed properly, each wholesaler in the chain can make money in real estate by adding their markup to the contract price.
2. No Capital Required: Wholesalers don't need substantial capital as they don't need to purchase the property outright. This can be an attractive way for new investors to get started in real estate without a significant initial investment.
3. Expanded Network: Daisy chains can help wholesalers expand their networks, providing them with more potential deals and contacts in the future.
4. Higher Volume of Deals: Since daisy chaining doesn't require the wholesaler to hold onto the property, they can handle a higher volume of deals. They merely assign the contract, allowing for faster transactions and enabling more deals within a shorter time frame.
5. Greater Reach: As a part of a chain, wholesalers can access deals and markets they might not have reached on their own. A wholesaler in the chain may have a network of buyers in a different geographic area, leading to a wider distribution of properties.
6. Less Marketing: Daisy chaining can reduce marketing efforts. Instead of reaching out to potential buyers, you're reaching out to other wholesalers who are already in the market for properties. This process could potentially save time and resources.
7. Financial Gains: Although each wholesaler adds a markup, these can be small, reasonable amounts. The property's price may increase, but each wholesaler makes a profit, and the final buyer gets the property at a fair market value.
8. Learning Opportunities: For novice wholesalers, daisy chaining offers a chance to learn from more experienced wholesalers. It's an opportunity to understand the market better and gain practical knowledge about contracts and negotiation.

How to Daisy Chain the Right Way: A Detailed Guide

Let's take a more detailed look into how you can create a successful and ethical daisy chain:

1. Do Your Homework: Understanding the ins and outs of daisy chaining is vital. Attend seminars, listen to podcasts, read books and network with experienced real estate investors. Ask questions and learn from their experiences.
2. Find a Profitable Deal: Use your networking and negotiation skills to find a motivated seller and negotiate a win-win deal. The better your initial deal, the more room there is for subsequent wholesalers in the chain to profit.
3. Prepare a Clear, Legal Contract: Consult with a real estate attorney to ensure your contract is both legal and clearly states that it is assignable. The terms should be fair to all parties involved.
4. Ensure Transparency: Always be upfront about your intentions to assign the contract to another wholesaler. This transparency builds trust and respect among all parties involved.
5. Set Reasonable Markups: Be fair when adding your markup to the contract price. An inflated price may discourage other wholesalers or end buyers and can slow down or halt the chain.
6. Establish Strong Networks: Build relationships with other reliable and ethical wholesalers. These relationships can help ensure a smoother chain and a quick transaction process.
7. Close Efficiently: Work with a reputable closing agent to ensure all paperwork is completed correctly, and the transaction is closed promptly and efficiently.

Remember, while daisy chaining can be a profitable real estate strategy, it requires a lot of due diligence, communication, and network building. Whether you're a seasoned real estate investor or a beginner, conducting business ethically should always be at the forefront of your operations.

This ethical approach will not only ensure the longevity of your business but also contribute positively to the industry as a whole.

Keep in mind that real estate is about building long-term relationships. If you wish to delve into real estate investing, it's advisable to get proper real estate education, perhaps from a seasoned investor or a guru, and even obtain a real estate license if you plan to act as a broker.

Don't hesitate to ask for advice from experienced real estate brokers, real estate investor mentors, or real estate lawyers to guide you through this process. They can answer questions, clarify any misunderstandings, and guide you through the process during a conference call or a one-on-one meeting.

And remember, there's more to real estate investing than just daisy chaining. Explore all the avenues available to you before settling on the best way to invest in real estate. 

Conclusion: Dairy Chain Properties

Daisy chaining in real estate, despite its pitfalls, can be a rewarding venture when handled ethically and transparently. It allows for higher deal volume, broader market reach, less marketing effort, and crucial learning opportunities. However, it all begins with finding lucrative property leads.

With Property Leads, you can secure details of motivated sellers, increasing your chances of sealing deals quickly and setting your daisy chain into motion.

So why wait? Empower your real estate journey today. Sign up with Property Leads and let's together redefine the art of real estate wholesaling, one daisy chain at a time.