Do you want to invest in real estate without financial risk and without money or credit? Wholesaling homes is a popular option. Personally, I find wholesaling can be a challenging way to get started, but the fact that you can start investing in real estate without any barriers to entry makes wholesaling an attractive option. If you can be good at this side of the business, you will be successful in anything you want to do. The reason I say finding deals is what makes a successful wholesaler. If you can be good at finding deals, you have unlimited potential.
Once you find a deal, you need to understand how to sell it for a profit. Here are four ways you can structure your wholesale properties.
Contract Assignment: This is the easiest, but it does come with some risks if not done correctly. It is also somewhat restrictive as bank properties will prevent it. This works well when you negotiate your offers directly with the seller. The way this works is that you will get a house under contract and then assign your rights in the contract to another buyer for a fee. That new buyer will assume the rights and responsibilities of the contract and close on your behalf. It’s best if you pay your fee up front, but it’s very common to receive your fee when the buyer purchases the home. Here are some things to keep in mind when assigning contracts.
Be sure to always disclose to your seller that you are or may assign the deal to another buyer for a fee. I suggest you put this in the contract. Sellers should agree to this if you are transparent that you are an investor buying houses for profit before you start trading.
You would get money from your money that is at least enough to cover any security deposit you give your seller. That way, if your buyer defaults on the deal, you’ll at least cover your costs. Always try to get paid the full rate when you assign the contract.
I like this way better because it’s easy for you to do, it’s easy for the buyer and the buyer’s lender, and it’s the cheapest way to do it.
Double closure: This just means that you actually buy the house and then resell it. There are several ways to do this, but the most common is to buy and sell on the same day or within a day. You will usually need to obtain financing to close with the seller, which is why this is my least preferred method of wholesale. Also, because you have two closings, you’ll have two sets of closing costs, so it’s also the most expensive way. That said, some wholesalers prefer this method because they don’t have to disclose their intent to resell to the seller and can keep their dealings with the seller and their dealings with the buyer private. Some believe that this is a good way to protect their profits. All information will become public record at some point, but that will be long after the closing.
This is the method it will default to if you don’t do your contract on the front end correctly, which is why we see double closes frequently.
Flip the entity: This has become the most common form of wholesale in my market. Most, if not all, successful wholesalers will use this strategy. Especially when it comes to wholesale foreclosures where contract assignments are prohibited.
The way this works is that the wholesaler will set up a separate entity, such as an LLC or trust, and list that entity as the buyer of the home to be sold wholesale. They will then sell the entity itself for a fee. The benefit of using this strategy is that the actual house contract does not change. Since the home buyer is the entity, there are no issues with any regulations or allocation restrictions. The downside is that it could be more work due to the extra step to establish the entity, and there could be additional fees to register the entity with the state. The risk for the buyer is that every time he buys a company, he is buying it in its entirety. So if the entity was used in another transaction and owes someone money, the new buyer could be in trouble. Knowing this, the best way to do this transaction is with a new entity used for this sole purpose.
Close relationship: I don’t know if there is an actual name for this method. In fact, it is rarely seen. What I mean by close relationship is that you have such a strong relationship with a buyer that you write offers on behalf of the buyer. For this to work, you must be a licensed agent and preview homes for your buyer. You should understand their criteria and only offer homes that they will want to buy. I have a client who works this way. You have an agent who writes your offers and the agent/wholesaler is paid a commission on each successful closing. They do 2-3 deals a month with this strategy. My client just signs contracts without looking at them at this point and trusts that the wholesaler is putting together solid offers. There is always an inspection clause that protects the buyer and the agent, but more than 9 out of 10 houses that are contracted close. This is because the agent/wholesaler knows the business and knows what this buyer will buy.
I’d stay away from this method, especially if you’re just starting out. Many things can go wrong. I wanted to mention it because it’s one of the 4 ways I see people wholesale. If you’re just starting out, I’d focus on contract assignments and then change the entity.