You know about house flipping, where a real estate investor buys a fixer upper, brings in their team of contractors to do the necessary repairs and upgrades, and then sells the fixed up house for a higher price.
Sounds profitable, right? But also it requires the investor to shell out a nice chunk of cash upfront--something not everyone has.
What if we tell you that you can get started on real estate investing without ever having to spend a cent of your own money?
Yes, you heard right!
Enter the investment strategy called real estate wholesaling.
Also known as flipping contracts, with this strategy you don't need to buy the property outright nor perform rehab works and repairs prior to the sale.
As a matter of fact, you don't even need to step foot in the property!
In wholesale real estate investing, you use a contract to obtain the exclusive right to a real estate purchase with the end goal being to sell that right to another buyer for more than what you are contractually obligated to pay. You earn by getting the difference known as the assignment fee.
Technically, although you act as a middleman between the owner and the end buyer, the good news is, in most states, you don't need a real estate license unlike a real estate agent before you can wholesale property.
That said, you must be prepared to invest significant amounts of time and effort in order to close your first wholesale deal. Getting a mentor who's an expert in wholesaling real estate can speed things up as well.
Think you have what it takes to wholesale real estate? Read on.
"Buy low, sell high."
This is the investment strategy employed by successful real estate investors. The profitability of wholesaling hinges upon finding distressed properties and getting the right to purchase them for lower than the market value.
Do note that not all homeowners would willingly part with their property for less, especially in today's hot real estate market. What you have to look for is a special type of property owner: a motivated seller.
A motivated seller is a property owner with a pain point, and someone who is eager to offload a problematic property fast. These "motivations", or pain points, can range from:
When dealing with a motivated seller, it would be good to remember that the endgame isn't all about getting as much profit as you can. A little sensitivity and care in handling the transaction can certainly go a long way, because ultimately, these sellers are looking for help which you can provide.
A bit of business advice: when you gain a reputation as a helpful wholesaler, these leads would come to you.
To find these leads, you can employ old school strategies like cold calling, bandit signs, driving for dollars, or use innovative techniques such as creating a website, running ads on social media, or hiring an SEO agency.
You can also purchase leads from online marketplaces so that you can quickly proceed to the next step which is...
Your offer should strike the delicate balance between what's acceptable to the home seller and what the end buyer, typically another investor as distressed properties are hardly move-in ready, would be willing to pay.
In this regard, looking at similar properties within the same area that recently sold can help you establish a baseline for the offer. Once the owner accepts, you can then...
In a nutshell, this document contains your offer and all other provisions relevant to the real estate purchase.
You may or may not make an earnest money deposit as part of the agreement, but it is important that you have a clause specifying that you can assign the property to a new buyer who will be the one to ultimately assume property ownership, clearing you of any responsibility once the money and the property changes hands.
The content of this real estate purchase and sale agreement will be discussed in-depth in the sections below.
It is recommended that you consult a real estate attorney to have them look over the purchase contract and make sure everything is legally sound before presenting it to the seller.
After you and the seller both sign the purchase agreement, you have now entered into equitable conversion, a real estate doctrine which makes you the equitable owner of the property even if the actual sale takes place at a later date.
Now it's time to shop around for cash buyers who would be interested in getting the property for a higher price than what you and the seller have agreed upon.
Why cash buyers?
Remember, motivated sellers are looking for someone who can close fast to relieve them of their burden. Cash buyers can close fast without the uncertainty of having to wait for loan approvals, and most of them take care of the closing costs to boot.
Once you have a buyer, it's time to transfer your right to purchase the property via a wholesale real estate assignment contract.
Finalizing a real estate transaction usually happens with a title company to make sure that the bare legal title is transferred and that there would be no clouds on the title that could impede the sale.
However, with wholesale real estate contracts, there is a layer of complexity since three independent parties are involved.
Pro tip: Find a title company experienced in the wholesale real estate business for a smooth and efficient closing process.
This is a short term investment strategy with a very fast turnaround--typically within 30 days. If you have a huge network with an extensive wholesale buyers list, wholesaling properties can be very lucrative.
Wholesaling houses allows you to enter the arena of real estate investing without having to pay the steep financial barrier of entry.
For a wholesale real estate example, say there's a fixer upper you got the right to purchase for $80,000. You then turn around and secure a buyer via an assignment contract for $100,000. You get the $20,000 difference as your assignment fee, and you didn't spend a dime.
Earning $20,000 in 30 days certainly isn't bad at all!
A real estate wholesale contract is necessary to facilitate the smooth transfer of ownership from the seller to the end buyer and get you your compensation for putting the deal together.
It would be a good idea to have a real estate lawyer to review your wholesale real estate contract to be sure you're not breaking any laws--local or otherwise.
In your wholesale contract template, you must have space for the information of both parties involved. Fill in their names, phone numbers, and email address. Leave space for both the seller and the buyer to sign to ensure that the contract is legal and binding.
If you don't have a buyer yet, as is usual with real estate wholesaling contracts, fret not as this can be filled in later.
This section contains all the necessary information about the property such as the size, location, condition, tax identification number, and the legal description of the property.
Property condition: this describes the current, up-to-date state of the property, particularly existing damage and necessary repairs to be done.
Legal description: this is not the address but a unique identifier which supplies the surveyor with the information necessary to establish the property boundaries and measurements. In cases of boundary disputes, the court could just refer to the description to determine whether there has been an encroachment.
Tax Identification Number: used by the county tax assessor's office to bill the property taxes.
The wholesale contract should contain the agreed upon purchase price, and if it isn't to be paid in full, a payment schedule must be included.
The closing date indicates the last day of the validity of the wholesale real estate contract.
Once the closing date passes, the real estate assignment contract is void and the wholesaler can no longer buy the property.
Additionally, the assignment contract must indicate up to when the actual possession of the property may take place; for example, right after the closing or up to a few weeks after the closing to give the seller time to move.
From the get-go, establish the primary mode of communication whether it is via fax, email, SMS, or in person.
Additionally, these days, electronically signed documents are becoming the norm. Still, it is better to indicate in the contract that electronic signatures and initials are equivalent to those done by hand.
Inclusions in a wholesale contract refers to everything that comes with the real estate purchase. This is arbitrary, and can range from free gym equipment to full on landscaping.
Exclusions are the opposite. For example, the seller can dismantle the wall mounted shelves and take it with them after the sale.
In any case, all these must be listed in the wholesaling contract.
Not all real estate transactions have a hundred percent chance of going through, so a buyer's and seller's default clause must be included so if either party fails to uphold the terms of the contract, they are protected.
If the buyer depends on financing from banks or mortgage companies, inspections and appraisals usually come required. However, even if the potential buyer is a cash buyer, there's no one stopping them from asking for an inspection.
It should be specified who will be paying for it and what would happen if the property fails an inspection. For example, the buyer can back out from the contract should the latter happen.
A disclosure contains details about the house that potential buyers may find unfavorable. It serves to help the end buyer make an informed decision regarding the purchase, especially if the property in question is in a state of disrepair.
These disclosures include, but are not limited to: a death in the home, termite infestation, neighborhood nuisance, environmental hazards such as a history of flooding or wildfires, black mold, and the presence of asbestos and lead based paint.
Consult state and local laws to find out the required disclosures so you don't risk the new buyer backing out of the wholesale deal, or worse, being on the wrong side of the law.
Sellers who enter in wholesale deals are looking to sell their property as quickly as possible, even if it means that they sell for less than the market value of their property.
To protect the seller's interest and assure them that they won't be waiting around indefinitely, you can have the wholesale contract contingent on you securing a buyer within a specified number of days.
This is an absolute must-have when drawing up the wholesale real estate contract.
This gives you the exclusive right to do everything necessary to ensure the successful sale of the property while getting compensated for your efforts.
The contract assignment clause must explicitly state the following:
Wholesale real estate assignment contracts is an innovative way for new investors with very little capital to get into the game.
And the first step on the road to success in this business? Finding motivated sellers.
Here at Property Leads, this is something we specialize in.
We can give you access to the highest converting motivated seller leads generated through SEO so you only need to talk and negotiate with a few sellers but you score the best real estate deals!
Want to get started? Fill in our form below, schedule a call with us, and get leads delivered straight to your inbox!
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