The biggest mistakes I see beginning wholesalers make is the way they write their contracts. It is very important that you know what your exit strategy is before you make your offers. If your plan is to wholesale it, you need to be much more careful with your offer.
A wholesaler is typically someone that gets a house under contract and resells the house (or the contract) to another investor for a small fee. The wholesaler normally does not ever close on the house, so there is no need to get a loan or put down a bunch of money. It is a great way to make some money in real estate without the risk of rehabbing or tenants.
I am going to go through the different ways to list yourself as the buyer on a contract and the impact it will have on you closing a wholesale transaction. These are listed from least favorable to most favorable.
- Your personal name
This is by far the worst way to make offers on your property if your intention is to wholesale it. Unless you have an assignable contract, (which we talk about below) you will be forced to close on the house before you can sell it. This means you will need to buy the house and resell it; which you can probably do the same day. If you do it this way you will have additional costs and you will need to find a title company that will even allow it. The additional costs to you can include fees for a short term loan and another set of title fees. Feel free to call us if you have already made the mistake by making the offer in your name, and we can help guide you to the closing table.
- An entity that is currently doing business
This is basically the same thing as using your personal name with some additional asset protection. Since your name is not on the contract, your name will stay out of the public records; which is always a good thing. The bottom line is, if you use your current business entity to make offers you will need to close as described above.
- A Trust
This is when you create a trust to make your offer. The only thing the trust does is make an offer on that one piece of property. It will own nothing but the contract on the house you are wholesaling, so it is easy
to transfer. You would then simply transfer the beneficial interest or ownership in the trust to your buyer for your wholesale fee. This is a great way to assign an un-assignable contract, and is perfectly legal.
Some will argue this is the best way to wholesale deals because creating trusts are free, once you have a template. I don’t disagree, with one exception. Many lenders will not loan money to trusts, so you are limiting your buyer pool by a small amount. There are still plenty of buyers that can get financing in a trust, so it is probably nothing to worry about and Pine Financial Group is happy to loan money to a trust for your buyers.
- An entity not doing business (a throw away company)
This is very similar to what is described above, except it is most likely using an LLC instead of a trust. I like this one a little more because LLCs are easier to understand and there is less fraud, so more lenders are willing to lend. The two downfalls are, you need to register the company with the secretary of state so there is a small fee, and there is a chance someone already has a company called the same thing. One strategy that I see is investors use the address of the property as the name of the LLC. That way there is little risk someone already registered a company with the same name. Currently the cost to start an LLC in Colorado is $50.00.
- An assignable contract
This is by far the easiest way to do it. If your contact is assignable, it does not matter what name you use as the buyer, because you can simply assign the contract to your buyer for your fee by completing a short assignment form. These are becoming less common because banks and HUD does not allow this. The only way I see this working right now is when you are dealing directly with private owners. One mistake I see investors make is they try to offer assignable contracts to banks and their offers are quickly rejected.
I also want to point out that if you make your offers as all cash you will need to find a buyer that is paying all cash. This is because the title company will not allow the buyer to sign loan docs or will not allow a loan on the final settlement statement if the contract does not allow this. This has been a big problem is some of the deals we have closed, and will severely limit your buyer pool. I recommend not offering all cash so that you have a better chance to close with your buyer.
Don’t believe everything you see from the late night gurus. If you have questions about wholesaling, please call our office.