It's interesting to me that when most people hear the phrase “real estate wholesaling”, they automatically default to wholesaling through assignments.
Assigning contracts is one way to wholesale real estate, but it's definitely not the only way to get the job done.
In reality, there are three major ways real estate wholesalers make deals happen:
- Through an assignment of contract
- Through a double close
- Through a traditional close
In this blog post, I'm going to dive DEEP into all three methods of wholesaling real estate and I'll explain the pros and cons of each.
Now, if this is the first time you've heard about the concept of real estate wholesaling — or maybe you've heard of it but you're a little fuzzy on exactly what it entails — please take a second to read Part 1 in this series:
The Ultimate Beginner's Guide To Wholesaling Real Estate (Part 1)
Once you're fully up to speed, come back to this article to read up on how you can get going with your real estate wholesaling strategy.
Once you're good to go, let's dive right in!
Real Estate Wholesaling Through Assignments
Since this is the most common perceived method of wholesaling real estate, let's start here.
Essentially, what is happening in an assignment is that a buyer is selling their rights within a purchase agreement to another buyer.
Before we talk about it in regards to wholesaling, however, let's go over an example of a more conventional use of a real estate assignment.
Let's say you're an active buy-and-hold investor who purchases several properties a month and only buys properties built on a slab foundation. You know there are great deals that have basements, but you simply don't want to have the extra risk that comes with it (flooding, moisture, etc).
Now let's say there is a property that was advertised as not having a basement that you thought was a good deal. You made an offer, it got accepted, and you and the seller signed a purchase agreement. During your due diligence period, however, you discover that this property was falsely advertised and actually had a basement.
At this point you could either:
A) Pull out of the deal.
… or …
B) Assign the rights to the purchase agreement to another investor (for a fee) who has no problem with basements.
If you went with option B, you'd still make some money on the transaction, whereas with option A, you would have completely wasted your time.
This is an example of the conventional use of a real estate assignment. Its purpose is to allow a way for a buyer to ethically get out of a deal, based on unforeseen circumstances, while still keeping the seller locked in.
Disclaimer: I'm not a lawyer, and this is not legal advice. Please do not hold anything I say in this post as an authority on real estate or real estate law, and before you do anything related to real estate wholesaling, assignments or any activity related to real estate mentioned in this post and/or beyond it, seek the advice of a legal professional.
Having said all that, if I understand it correctly (as a licensed managing broker in the State of Indiana), one of the crucial aspects when it comes to assignments is intent.
In order for an assignment to be valid, both parties need to enter the original purchase agreement with an honest intent to close on the property, otherwise, the purchase agreement was never a true purchase agreement, and therefore any attempt to do an assignment would be null and void.
We'll come back to this point here in a moment.
How Assignments Are Used By Real Estate Wholesalers
When you wholesale real estate through assignments, what you do is enter into a purchase agreement with a seller and then simply turn around and assign the rights to that purchase agreement to an end buyer.
The biggest advantage of this method is that you never have to use any money in the transaction (unless you provide an earnest money deposit, which many wholesalers do not).
This means your only expense as a business owner is marketing! This is a HUGE deal because, all of a sudden, you can make thousands of dollars a month with little to no risk.
RELATED: How I Find Motivated Sellers (And Get Them Calling Me)
If you can't find an end buyer, you can simply back out of the deal, making this one of the safest real estate businesses to get into.
Let me give you an example …
Let's say you go driving for dollars, and send out some postcards to distressed properties.
A week or so later, a seller calls you and says they want to sell.
The property is located in a solid, up-and-coming neighborhood, and, after you run your numbers (in an upcoming post, I'll dive deep in exactly how you do this), you offer $25,000 (I'm using numbers typical for Indianapolis here) and they accept. Here are the steps you take:
1. You have them sign a purchase agreement with a long closing period (you should shoot for a 30-to-45-day minimum in order to have enough time to find a buyer).
2. You then shoot the property out to your buyer's list and begin marketing it with your assignment fee amount included in the price. (So, if you're getting it for $25,000, you list it for $32,000. Also, again, I'm not a lawyer, but I've heard it's best practice to market the contract for sale and not the property in your advertising language)
3. Once a buyer shows interest, you assist them with getting inside the property and be as helpful as you can while they run their numbers and do their due diligence.
4. They make an offer, and you both negotiate the final price, coming to an agreement at $30,000.
5. You then send the new buyer a copy of the original purchase agreement with an assignment contract.
6. Once it's signed and returned, you send everything to the title company (this part of the process is specific to the State of Indiana… depending on what state you're doing business in, your closing process may look very different).
7. At closing, the title company issues you a check for $5,000!
The 5 Major Issues With Wholesaling Through Assignments
As you can see, there are a ton of benefits to wholesaling real estate through assignments:
- You can easily back out of properties you can't find buyers for
- You don't ever have to worry about having the money to buy the properties yourself
- and you can get several deals going very quickly because of the low risk and barrier to entry
But, unfortunately, there are also a lot of drawbacks to wholesaling through assignments — so much so that, honestly, this is my least favorite of the three methods. Here are five major issues with wholesaling real estate through assignments.
1. Real Estate Wholesaling Through Assignments Might Be Illegal
Remember what I mentioned about intent earlier? When you wholesale through assignments, no matter how you slice it, your intent is not to purchase the property — it's to assign it.
So, one could argue that when you enter into a purchase agreement as a wholesaler (when assigning), it's not a valid purchase agreement simply because you're intent is not to sell the property — even if you explicitly mention in a disclosure within the purchase agreement that you're intent is to assign… it might not hold up in court.
Again, I am not a lawyer, so don't take my word for it, but it is something to consider and to seek legal advice on.
In addition to this, another way wholesaling through assignments may be illegal is that it could be interpreted that you're acting as a real estate agent without a license.
If you swapped out the purchase agreement with the seller for a listing agreement, what would be the major differences in your activities as a wholesaler verses that of a listing agent?
In my professional opinion as a licensed managing broker, not much.
You enter into an agreement with the seller, market their property for sale and gain compensation for finding a buyer.
Again, I'm in no way, shape, or form a lawyer, but I could see how, if it went to court, it'd be hard to defend against this.
2. The Seller Can Easily Get Screwed Over
If you tie up a property through a purchase agreement and then, after 45 days, back out because you couldn't find a buyer, that's not very fair to the seller.
It's a great benefit to the wholesaler that you can do this, without a doubt, but as a moral person, I don't feel right doing this to people.
Imagine if you had a property that had a lot of interested buyers, and then the guy you agreed to sell to, had it locked up for 45 days, and then last minute backed out. How would you feel?
You can offset this issue by communicating clearly what your intent is in the beginning.
You can say something like:
“Mr. Seller, what I do in my business is connect sellers to investor-buyers.
I work with many, many buyers who would jump at the opportunity to buy a property like yours -at a discount of course, for the repairs. Now, with this first purchase agreement, I'm going to try and get you the most amount of money I can within the first 45 days.
I think we stand a fair chance of selling it quickly, BUT there is a slight a chance it might not sell. If that happens, what we can do is adjust the price and then proceed to continue marketing until we find you a buyer. Sound good?”
Again, I don't see how this is any different than acting as a real estate agent without a license, but (you guessed it) I'm not a lawyer, so seek legal advice.
3. It Can Be Difficult To Market and Show The Property
A lot of wholesalers who do assignments feel like they shouldn't disclose the fact that they are assigning the property to the seller, in fear that they will get cold feet and back out of the deal. If you do that (it's probably illegal by the way) it makes it very difficult to market and show the property.
Imagine if the seller sees their property listed on Craigslist for sale $5,000 above what they're selling it to you for. How do you think that will go over?
Also, how do you explain the fact that you have so many people inspecting the property (even if it's vacant)? Do you not disclose to the seller that you have a bunch of random people going in and out of their property?
This is one of the most challenging aspects to overcome when wholesaling through assignments.
4. Sellers Who Back Out Can Ruin Your Reputation
If the seller gets spooked or weirded out for whatever reason and they can back out of the deal, it can ruin your reputation.
Remember: Your reputation is EVERYTHING in real estate!
Say you have a property assigned to an end buyer and on the day of closing the seller changes their mind about the deal. Who is the one that looks bad in the eyes of the buyer?
It's you.
They don't care that it was out of your control!
If it keeps happening and seasoned investors start experiencing this repeatedly from you, they'll stop buying because they'll think you're a waste of time and what's worse is that they'll share their opinion with all their other investor friends.
There is nothing worse than being labeled as a waste of time with seasoned, well-known buyers!
5. You're Forced to Show How Much Money You're Making to The Buyer
Due to the fact that you're assigning the rights to the original purchase agreement, they get to see the original purchase price. Then they see your assignment fee and if they have a problem with how much money you're making, they'll have the upper hand in negotiating with you.
Sometimes, in wholesaling, you can hit a home run and tack on $15,000 – $20,000 from the original purchase price (it's not every day, but it does happen).
If you have to disclose this to your buyer, it might be a hard pill for them to swallow and you might get some pushback.
It's a lot cleaner for the end buyers not to know how much money you're making.
My Biggest Advice When it Comes to Wholesaling Real Estate Through Assignments
Don't do it. (That's probably not a shocking answer, based on my explanation above, right?)
You'll see here shortly that there are much better ways to wholesale real estate. With how grey this strategy is – legally-speaking – I honestly wouldn't risk it.
If you're bent on wholesaling through assignments, why don't you just become a real estate agent who specializes in connecting distressed property with investors?
It's practically the same business model, without all the risk — the major difference being that instead of a percentage of the sale price, you simply negotiate a flat rate as a commision (so for example a $5,000 commission instead of 3%). You could also try and structure it where the buyer pays the agent commission and not the seller.
This is unconventional, but if you're working with real estate investors, I don't think you'd have any issues structuring the deal like this because they know what's involved in working with a motivated seller — namely that they need money!
Real Estate Wholesaling Through A Double Close
When we talk about wholesaling real estate through a double close, it's very similar to the process of closing through an assignment — except it has much fewer drawbacks.
With a double close, what happens is you, as the wholesaler, sell the property to an investor-buyer, and the investor-buyer pays for the transaction between you and the motivated seller.
Let's use the same numbers as the example above.
Say a seller agrees to a purchase price of $25,000 and you market it for sale at $32,000.
Well, when the buyer agrees to pay $30,000 for it, the main difference is you send a brand new purchase agreement to the buyer, between you and them.
Once you get it back signed, you send both the purchase agreement between you and the buyer as well as the purchase agreement between you and the seller to the title company to process the closing. They then plan to conduct each closing back-to-back on the same day — thus, the name double closing.
To be abundantly clear, you have two different purchase agreements in place: one between you and the seller and another between you and the buyer.
You send both purchase agreements to the title company at the same time, and if the title company is investor-friendly, they shouldn't have an issue conducting a transaction where they use the funds of the buyer, to pay off the seller — and paying you the difference in between.
So, in our example, say you meet with the buyer first at closing. They wire in $30,000 to escrow to purchase the property.
In the closing documents, there is an additional disclosure form that the buyer signs, giving their acknowledgment and consent to the title company using the funds from this transaction to pay the seller in the other.
This disclosure form does not display how much the wholesaler purchased the property for, which is a huge plus!
After you and the buyer sign everything, the buyer walks out with the title in hand.
Then, moments later, the seller comes in, and you conduct a second closing, where you buy the property from the seller for $25,000.
The title company uses the funds already in escrow to issue the seller a check for $25,000, and then they release a second check for $5,000 that's yours ($30,000 – $25,000 = $5,000).
The 3 Major Benefits of Wholesaling Through a Double Close
In my opinion, wholesaling real estate through a double close is the overall best way to conduct this business. Below are the top three major reasons why:
1. It's Legal!
With a double close, you won't run into the same issues legally (so I think … but as you know, I'm not a lawyer, so always check with them and not me!).
You are actually purchasing the property from the motivated seller. Sure, it may only be for the 15 minutes you're at the closing table, but you actually close on it and own it, all the same, so your intent is true to the purchase agreement.
Second, when you sell it, you are in fact selling your own property, so the issue of functioning as a real estate agent without a license is not as strong of a case.
I'm always going to encourage all wholesalers to get their real estate license because if we're making our occupation the buying and selling of real estate, it will always help us and not harm us.
As a real estate agent you do need to disclose certain things to the seller that you otherwise wouldn't have too, for instance, the fact that you're buying this property at a discount, but if you're upfront about things, I've found this to be an aid in establishing trust and not a hindrance.
I always lead with:
“Mr. Seller, I want you to know that I am a real estate investor, so in order for me to make this work with you, I need to be able to buy your property at a discount.
Now, I'm all cash and normally can close quickly, and I'll do my best to give you the highest offer that I can but if my offer doesn't work for you, I completely understand and there is no pressure.
Sound good?”
This way, they understand from the beginning that you're seeking a deal and there is no hidden agenda.
2. You Get All of The Benefits of Assignments
With wholesaling through a double close, it has all of the same benefits as assignments:
- You still never use any of your own money to acquire the property
- If you can't find a buyer, you can back out with hardly any real damage (just as long as you set up your purchase agreement correctly)
- and you can build up to doing a lot of deals quickly
3. You Don't Have to Disclose How Much Money You Made to Your Buyer
Unlike assignments, however, you have the added benefit of never having to disclose what you make to the investor-buyer!
You can make $5,000, $10,000, or even $100,000, and the buyer will never know. This keeps things a lot cleaner and gives a neutral ground for negotiations.
The 4 Major Issues with Wholesaling Through a Double Close
Even though using a double close is a fantastic way to wholesale real estate, there are still some flaws with this method.
1. The Seller Can Still Back Out
Just like with assignments, in a double close, the seller backing out and ruining the deal is 100% outside of your control.
If you tend to have deals fall-through last minute, the issue of your reputation staying intact is still a major concern.
Real estate is a people-based business, and what people think about you, to some degree, actually does matter.
Being a person of your word, closing on time, being honest — it's all a crucial part of being successful in business.
Again, you can offset this issue, as well as many others, by using a pitch like this:
“Mr. Seller, what I do in my business is create win-win's between sellers and investors.
I work with many investors who go in on the purchase with me, if the property matches their investment criteria.
Now, with this purchase agreement, I'm going need some time in order to find the right investor to work with me on the purchase — it will be all cash and normally I find an investor quick and we close in a couple of weeks, but just to be safe, I'll need about 45 day window.
I'll also need permission to show them the property, so that they can run their numbers and see what repairs are needed… would this be okay with you?”
This way, when they agree, they understand that there is another party in the equation and won't get spooked (as easily).
2. The Seller Can Still Get Screwed Over
Again, if you tie-up a person's property for 45 days or longer and then back out of the deal, or worse, your buyer backs out, it can be really unfortunate for the seller.
Whenever the top wholesalers I knew in Indianapolis did an assignment or a double close, they always made sure to have the cash in reserve to proceed with the closing, even if the buyer backed out.
Seller's talk too, and you need to have as good of a reputation in your market as possible … if for nothing else so that you can get referrals and good reviews online.
3. You Need to Find an Investor-Friendly Title Company to Make This Work
A big disclaimer: Double closings may not be illegal in every market. I encourage you to sit down with a local attorney to discuss the unique process and paperwork that's needed to do this legally and ethically where you do business.
Another excellent source for finding an investor-friendly title company (or the local method used for double-closings in your area) would be attending a real estate investor networking event of some kind.
Meetup.com is a great choice, as are local REIA groups.
4. Scheduling Both Closings Can Be A Hassle
One of the most critical aspects of the double close is timing the closings back-to-back. Sometimes, the title company will work with you and be comfortable doing it a few hours apart but to coordinate two separate parties, plus you and the availability of the title company all in the same day. It can be a challenge for sure!
Real Estate Wholesaling Through A Traditional Close
The final method to conduct business as a real estate wholesaler is to simply buy a property, close on it, then market it for sale.
This was our strategy at Simple Wholesaling because it gave us the most control. This method requires a lot of working capital but indeed gives you the most security.
Going back to the example used above …
If there is a seller that agrees at a purchase price of $25,000, with a traditional close, you'd simply have the money to close on it, then turn around and market it for sale at $32,000.
Once you had the buyer at $30,000, you would merely close a second time, 100% separate from the seller.
The Benefits and Drawbacks of Wholesaling Through a Traditional Close
With a traditional close, you actually get all the benefits of both other methods, with none of the drawbacks except for two:
1. You Need the Funds to Buy all of Your Inventory
2. If You Buy a Bad Deal, You're Stuck With It
I mean, think about it: It's your property, so you can literally do whatever you want with it. You can show it anytime. No one can accuse you of breaking the law for selling your own property. You never have to worry about the buyer knowing how much you paid for it -it's literally the best case scenario -except for the two issues above.
One of the ways you can get around the funding issue is by bringing on private money lenders.
There are investors, who, as an investment strategy, fund real estate businesses in exchange for a high-interest rate (8-15%).
If you get a couple deals under your belt, it's not that difficult to find a private money lender to work with you. It could be a friend or relative, or a professional conducting private loans in your market.
There are ways you can even coach your friends and family to use their IRAs for this purpose by making it self-directed (I am not a CPA, so make sure you double-check what I'm saying here with a tax professional).
Related: How I Just Made $20,000 TAX-FREE With My Self Directed Roth IRA
In terms of buying a bad deal, the only way to offset this is by being conservative and really knowing how to run your numbers.
In part 3 of this blog series, I'm going to dive deep into the details of exactly how to do this.
What's To Come
Now, that we've covered the three different methods of wholesaling, I now want to introduce you to the three departments of every real estate wholesale business out there:
- Acquisitions – where you buy deals
- Dispositions – where you sell deals
- Transactions – where you handle the paperwork for both
In the next portion of our ongoing series, I'll be covering Acquisitions and then the rest in the weeks to come.
When I go over Acquisitions, I'll be covering exactly what metrics you need to calculate returns as well as how to get deals and talk to motivated sellers.
The post The Ultimate Beginner’s Guide To Wholesaling Real Estate (Part 2) appeared first on REtipster.
from REtipster https://ift.tt/2IsrfiA
No comments:
Post a Comment