Wholesaling is an investment strategy that pulls together all the skills necessary to succeed as a real estate investor. Basically, a wholesaler finds a good deal, puts together a contract to buy it, finds an interested buyer, and then collects a fee when that buyer takes over the terms of the contract. The mechanism that allows the buyer to take over the duties and receive the benefits of the contract is known as the “assignment of contract.” Let’s take a closer look at this invaluable tool and how it can fit into your investment arsenal.
How does wholesaling work?
Wholesaling has several steps.
- Find a motivated seller, negotiate the terms of the sale, assemble a wholesale real estate contract, and have the seller sign the purchase agreement.
- Conduct a title search.
- Find a buyer, ask for a nonrefundable earnest money deposit, and finalize the assignment agreement to legally handover ownership rights to the buyer.
- The buyer buys the property per the terms of the contract from the seller according to the original purchase agreement.
- The buyer is now the homeowner, the seller has been paid, and you collect your assignment fee.
What does it take to be a successful wholesaler?
A large part of wholesaling is knowing how to find a property worth wholesaling. That means:
- Being able to identify a good candidate for flipping.
- Being able to identify a good candidate for renting.
- Estimating the cost of improvements that will add value to a rental.
- Estimating rehab costs.
- Estimating the costs of significant improvements (like replacing an HVAC).
- Estimating potential rents, cap rate, and cash-on-cash return.
What’s the difference between being a wholesaler and a real estate agent?
You may have noticed that being a wholesaler looks a lot like being a real estate agent. But there are differences between the two.
- Real estate agents sell property; wholesalers sell contracts.
- Real estate agents market property; wholesalers market contracts.
- Real estate agents collect commission; wholesalers collect assignment fees.
These differences are significant because being a wholesaler can occupy a legal gray area. That’s because some argue that a wholesaler is just a real estate agent without a license. This can get you in trouble depending on the state you wholesale in.
There are potentially two ways to get around this situation:
- Get a real estate license.
- Buy the property yourself.
Getting a real estate license might be a good idea either way because
- You don’t have to worry about wholesaling without a real estate license.
- Everything you learn to get your real estate license will help you be a better real estate investor.
How does an assignment of contract work?
Once you’ve found a motivated seller, they sign a purchase agreement, which is a sub-agreement within the wholesale real estate contract that allows you, the assignor, to assign the agreement to the eventual buyer, the assignee.
The purchase agreement should clearly state that you, as the buyer, are a real estate investor and that you’re going to assign the contract to a different buyer. Make sure to read this part carefully to the seller and confirm that they understand this part of the agreement. They should sign or initial it. This reduces the likelihood of the seller backing out of the contract.
The assignment of a contract happens when you pass the contract’s obligations and benefits to another party, the assignee, who in this case is the buyer. The verbiage, “and/or assigns,” allows you to reassign the property. Your wholesale real estate contract should contain a portion about receiving a nonrefundable earnest money deposit. When you receive this deposit from your buyer, that’s when you know they’re serious. Then you’re almost at the closing!
Are assignments of contract legal?
Yes, but you should have a lawyer look over your wholesale real estate agreement for two reasons.
- So that you know your contract is legally sound.
- So you have a lawyer to work with if you end up in litigation.
How do I find motivated sellers and buyers?
Motivated sellers tend to have a distressed property, meaning that the properties are either for sale by the owner or foreclosed. You can use public records, internet research, and networking to find motivated sellers. Similarly, networking and advertising will help you find buyers as well.
How do you conduct a title search when wholesaling?
There are several ways to find a lien on a property, but that will be handled by either a title company or closing attorney. These are independent third parties that will make sure everyone involved will agree to the deal as it exists in the contract.
What is a nonrefundable earnest money deposit?
This is money that shows that the buyer is serious about taking over the contract. Your wholesale real estate contract should say something along the lines of, “The assignee will reimburse the assignor for the money paid up front.” The deposit is usually held by the title company or the closing attorney.
How much do wholesalers make?
Wholesalers usually make $5,000 or less, although greater amounts are possible.
What is a double close?
Also known as a simultaneous close, a double close is when the seller and buyer’s identities remain unknown to one another. Not all title companies perform double closes, so find out in advance.
Are there any types of properties that are ineligible for assignments of contract?
Hud homes, real estate owned properties (REOs), and listed properties can present complications for assignments of contract. REOs, which are properties that failed to sell at foreclosure sales and are now bank-owned, may require waiting 90 days before you can resell the property.
Are there downsides to assignments of contract?
You have to stipulate your assignment fee in your contract, which means that your buyer will have the upper hand in negotiations. Additionally, until the deal closes, you’re at the mercy of the seller. If the seller decides to back out, all your hard work is for nothing. And if enough deals fall through, it will ruin your reputation. For this reason, some wholesalers try to conceal that they will be performing an assignment of the contract, but that’s unethical.
Are there any tax benefits to wholesaling?
Many real estate tax benefits give real estate an edge over other investment forms. As a real estate investor, you can use the 20% qualified business income deduction. Additionally, your business purchases, like computers or software, may qualify for 100% bonus depreciation or the Section 179 deduction.
Can you wholesale remotely?
Yes, you can put together a team with a title company, attorney, and even a partner to help you close deals. You can handle the research, negotiations, and more from home. This is useful if you’re hoping to search for homes in
- Gateway cities
- Landlord friendly states
- States with no property tax
- The best places to invest in real estate
Bottom Line
Now that you know the exact mechanics of wholesaling, you can do it yourself! Wholesaling is one of the most common investment strategies, in part because It’s one of the investment strategies you can do with zero to bad credit. At the same time, wholesaling is also a demanding and challenging strategy. You’ll need to know a lot about real estate investment to be a wholesaler. Luckily, you’ve got a great educational resource in the HomeUnion®® Real Estate Blog!
