BiggerPockets

Wholesaling is just a form of brokering, and the wholesaler would not normally actually buy the property. You assign the contract, do a double close, or buy in an entity and then sell the entity. So, you would not normally need to have funding to actually buy the property.

You may need "transactional funding" to allow you to buy the property and then immediately sell the property and repay the transactional funder. Immediately as in both transactions occur the same day, or, a few days apart. Typically, the transactional lender requires you have the buyer lined up and ready to go before they will make the loan.

With private money (i.e., someone you personally know, friends and family), you can negotiate anything you want.

If you were to actually buy the property and couldn't resell it, then you would have to keep it.

If a property is worth $65K, fixed up, then you're going to need to buy for quite a bit less than $50K. The usual rule of thumb for a fix and flipper is 70% of ARV. That's $45,500 for a $65K ARV. Then you subtract fixup (that's never $0), your fee, and all the costs of the transaction. I would assume you want to make at least a few grand for your efforts. If the place needs $5K (paint, carpets, and a few small repairs), you want $3K and you have another $2K in costs, you can pay no more than about $35K.

Do you acquire control over a property without actually buying it? When you say assign, what does this mean?

So what is the risk for the wholesaler? Is there a clause to "get out" or something?

If a seller gives the wholesaler control, via a contract, who has the burden of risk if the property doesn't sell?

Hey, Bryan. Wholesaling using assignment, broken down into basic steps, should look something like this:

1. Negotiate with seller, get the property under contract (Purchase & Sale Agreement). There is usually an inspection clause (or something similar) that allows you to get out if you can't find an end buyer.

2. Assign your Purchase & Sale Agreement to your end buyer, usually a cash buyer, using an Assignment of Contract.

3. Seller and end buyer go to closing, you make your money. Your money is the difference between what you got the property under contract for with the seller and what the end buyer is paying at the end of it.

You are essentially flipping the contract here, not necessarily the property directly. And as for your "get out" clause, that's what the inspection or partner approval clause is for. Just make sure you have one in your contract.

Hope this helps.

If the end buyer is a retail buyer, they need to be prepared to pay your assignment fee out of pocket.

If you do an assignment, the lender will use the price you're paying as the "value", unless the appraisal is lower.

If you do a double close, the whole deal may blow up when the lender finds out you (the seller) is not on title.

Thanks Jon and Will. I can't double close on this because I only am getting a small fee, which wouldn't even cover the closing costs (transfer taxes, transactional funding, etc.) so I am not considering that as an option.

Have any wholesalers out there heard of the method using the "Release of Equitable Interest"? Would be interested to hear if anyone had closed their sales to retail buyers that way.

Originally posted by Bryan Patton

Derek (or others):

If I am a seller, why in the world would I allow a buyer to sign a purchase/sales agreement with me with a clause that allows them to walk away if an end buyer cannot be found?

How does the conversation go between the buyer and seller?

Great question. Typically, when dealing with private sellers, they are not sophisticated enough to realize what the clause is for. Also, inspection clauses are very standard and with enough time in them, 17 days or more, you can use that time to locate a buyer. Key factor to being a good wholesaler is to have a large database of buyers and shop for properties meeting their criteria. Doing so will almost guarantee a buyer.

@Dawn, I think a key factor you have missed here is that the deal you have presented is not a deal at all and as such, almost impossibe to flip. No investor would pay over $50k for a property only valued at $65k. To properly wholesale, you need to contract at a much larger discount.
If the exit value (after repairs) is $100k, and repairs are $10k, you would need to contract at $60k just to have enough spread to do the deal yourself and that would be tight. If you wanted to wholesale and make $4k on it, you would need to contract it at $56k, then assign the contract.

Originally posted by Bryan Patton

Will-

What happens when the buyer says "What does this clause mean?" When you actually explain it, you might have a nice interesting conversation on your hands. how does that work?

I would say that I or any other investor would certainly not buy your property otr any other property without sufficient time to complete my due diligence. Would you buy a property from me without performing any due diligence?

Hi Will,

I think you misunderstood my original post. I wasn't looking to wholesale this deal to an investor, as there isn't nearly enough spread and the seller (and investor) has already fully rehabbed the property. I put this deal out to my mortgage broker contacts to find a retail end buyer from the start. (They put it out to their clients who are looking in that area and are pre-approved to buy for the offered price range.)

The numbers on my specific deal is the house is worth about $455K and I have an option on it for $440K, so an end buyer would be getting it $10K less than market value for a fully rehabbed property after I get paid my $5K fee.

Good deals in this area (Brooklyn) are still moving pretty well for discounted properties.

In any case, hopefully someone will have some feedback on the method I was inquiring about or offer some different options for closing with retail end buyers.

Ok-I just don't understand how wholesalers get away with buying at 70% ARV when a seller wants to sell for as close to appraised value as possible. And I don't understand how sellers can read a clause like that and not figure it out!