A wholesale real estate contract is a type of agreement used by a wholesaler to facilitate the sale of a property between a buyer and a seller. The contract gives the wholesaler the right to market the property and “assign” it to a buyer for a fee.
Essentially, the wholesale real estate contract gives the wholesaler control over the property’s title so that they can find another buyer to sell it to. However, the agreement does not give them ownership of the title – that remains with the seller until an actual sale goes through.
Although this may seem complicated, the idea is relatively straightforward. Wholesale real estate investing can also be quite lucrative, especially since you don’t have to put your own money on the line as the wholesaler. With that in mind, the following is a deep dive into wholesale real estate investing to give you a better idea of how it works.
Who Is Involved In A Wholesale Real Estate Assignment?
Traditional real estate sales involve two primary parties: the seller and the buyer. However, when it comes to a wholesale real estate assignment, there are three primary parties involved: the seller, the wholesaler, and the end buyer. These parties are explained in detail below:
The Seller Of The Property
The seller is the person who is selling the property. There are a few reasons why they might be willing to sign a wholesale real estate contract. One reason could be that they are behind on their mortgage payments and need to get out of debt quickly.
Another reason could be that they simply haven’t been able to sell their house and it’s been on the market for too long. A wholesaler can help sellers who want to sell quickly by finding a buyer for them on their behalf.
A wholesaler is a person who specializes in finding real estate deals and negotiating contracts with sellers. They then find buyers for the properties and assign the contracts to them for a fee. Wholesalers are typically investors or entrepreneurs with the time and resources to find good deals and execute them correctly.
The End Buyer Of The Property
The end buyer is the person who buys the property from the wholesaler. They are typically an investor looking for a good deal and are often willing to take on the risk of purchasing a property that may not be in perfect condition. End buyers may decide to work with a wholesaler if they are looking for a property that is not being actively marketed.
Essentially, a wholesaler can do a lot of the legwork for the buyer and help them find a great deal.
Essential Parts Of A Wholesale Real Estate Purchase Agreement
The purchase agreement is the contract that is drawn up between the seller and the wholesaler. It’s the most essential part of any wholesale real estate transaction. It outlines the terms of the sale and any additional provisions that must be met by both parties.
With that in mind, the following are the terms and provisions that must be included in a wholesale real estate purchase agreement:
Description Of The Property
The purchase agreement will include a description of the property, including its physical address and any other pertinent information, such as the size of the land (in acreage), the square footage of the house, the type of property, and more.
Type Of Deed
The purchase contract will also specify the type of deed used to transfer ownership from one party to another. For example, it may be a general warranty deed, a special warranty deed, or a quitclaim deed. The general warranty deed is the most common kind and confirms the grantor’s ownership and legal right to sell.
Condition Of The Property
The condition of the property is an integral part of the purchase agreement. It outlines any existing issues, such as plumbing problems, foundation problems, or any other issues the property may have.
Agreed-Upon Purchase Price And Financing Terms
The purchase agreement will also include the agreed-upon purchase price and any financing terms. This could include the down payment, loan amount, interest rate, and any other details.
Occupancy, Possession, And Closing Date
The purchase agreement includes occupancy, possession, and closing date terms. This section outlines when the seller must vacate the property, when the buyer can move in (if applicable), and the deadline by which the transaction must be completed.
The purchase agreement should also include a financing contingency clause. This means that if the buyer cannot obtain financing within a certain amount of time, the contract can be canceled and both parties are no longer obligated to adhere to its terms.
An inspection contingency is also a common feature of the purchase agreement. This means that if the buyer finds any issues during their inspection of the property that were undiscovered (meaning that they weren’t noted in the condition of the property part of the agreement), they can back out of the purchase agreement, and their earnest money deposit will be refunded.
Marketable Title Option
The agreement should also include a marketable title option. If the seller can’t provide a clear title to the property, then the buyer can back out of the agreement and receive their earnest money deposit back. In other words, they can only purchase the property if they can legally do so.
Additionally, if the buyer cannot obtain title insurance for any reason, a marketable title option can cancel the purchase agreement so that the buyer’s earnest money deposit is also refunded.
Buyer And Seller Default Clauses
The purchase agreement should also include default clauses that outline what will happen if either party fails to fulfill their end of the contract. This could include a provision that states that if the buyer fails to complete the purchase, they will forfeit their earnest money deposit or be subject to legal action.
Similarly, if the seller fails to adhere to their obligations, they may be subject to legal action or liable for damages. There should also be clauses detailing the rights of both parties if either defaults on their end of the contract.
Risk Of Loss And Damage Clause
A risk of loss and damage clause will protect the buyer from any losses or damage to the property that occur after the contract is signed. This clause states that the seller is responsible for any losses or damage to the property until it is officially transferred to the buyer.
An adjustments clause outlines how any outstanding items will be handled at closing, such as prorated taxes, unpaid utility bills, Homeowners’ Association (HOA) fees, and more. In addition, the clause should state who pays for the items and how they will be divided among the two parties.
The purchase agreement may also include addenda, which are additional written agreements that supplement or modify the terms of the purchase agreement. Addenda often cover specific topics such as lead paint disclosure, radon gas testing, or other details not included in the main purchase agreement.
The Process Of Getting Real Estate Contracts For Wholesalers
Because there are three parties involved instead of two, the process of wholesaling is a bit longer and more complicated than simply investing in real estate for yourself. However, many investors will start out in wholesaling because they don’t need any money upfront to make a profit.
With that in mind, the following are the steps you’ll need to take if you want to get involved in wholesaling real estate contracts:
1. Find A Seller
The first step in wholesaling is finding a motivated seller. This can be done by networking, cold calling, or even driving around a neighborhood looking for distressed properties. You can even lookup public records and tax filings to find owners who may be under financial pressure and want to sell.
Additionally, remember that even if you speak with homeowners who aren’t motivated to sell, they may know someone who is.Once the seller has been identified, you’ll need to ensure they are motivated and willing to work with you to sell the house quickly.
Even if a homeowner wants to sell, they may be less likely to agree to a wholesale real estate contract if they’re in no hurry or under no pressure to sell. This is because they may be expecting more money from a traditional sale and don’t think they need an intermediary to find buyers on their behalf.
2. Learn About The Property
Once you’ve found a motivated seller, the next step is to inspect the property. This can include a physical inspection or researching public records for any liens and other issues. Knowing the condition of the property’ and what you may need to repair is important before it can be sold.
Additionally, you’ll want to research the taxes due on the property and any potential HOA dues or other fees that may need to be paid.
This information is essential to putting together the contract terms. After all, if the property requires significant repairs or renovation work, it will affect the value of your offer to the seller.
3. Negotiate Contract Terms
Once you understand what you believe the property is worth in its current state (as well as what its potential value could be), it’s time to start negotiating the terms of your real estate contract. You’ll want to land on a price that is fair to both the buyer and the seller. If it’s unfair to the seller, they won’t sell. Likewise, if it leaves no room for profit to the buyer, they won’t want to invest.
Make sure to be as detailed as possible in the contract. For example, it should note any repairs that need to be made and the timeline for when they must be completed. Additionally, include any contingencies you require, such as inspections or surveys.
A clear, detailed wholesale real estate contract ensures that the buyer and seller understand their rights and obligations. Additionally, it provides protection if either party fails to uphold their end of the agreement. Finally, it helps prevent misunderstandings or disputes by spelling out exactly what is expected of both parties.
4. Market The Property And Assign The Contract Assignment
Once you’ve negotiated the terms of your contract, it’s time to find a buyer. Doing so can be challenging, especially if you’re first starting out. You’ll want to eventually build a whole list of real estate investors you can use to market wholesale properties to in the future. You’ll need to network extensively to build your list.
For example, join relevant groups on social media to find potential leads. Scour online listing websites for buyers. Tell everyone you know that you’re wholesaling properties and looking for investors.
Once you find an end buyer, you’ll assign them the contract, giving them the right to purchase the property. However, it is common to require earnest money up front in case the buyer backs out. This money will help protect your financial interest in the transaction and compensate you for your time and efforts.
Is Signing A Wholesale Contract A Smart Strategy?
When it comes to wholesaling, you may make less money than investing directly in real estate (for example, compared to fixing and flipping houses or buying rental properties). However, unlike other types of real estate investing, wholesale investing requires very little upfront capital and presents almost no risk.
Instead, you’re essentially earning fees as an intermediary that connects sellers to buyers. As a result, wholesale real estate contracts are a great short-term investment strategy, especially if you’re just starting in real estate investing.