NEED HELP understanding the wholesale process
Hello… I’m a new real estate investor and have spent a good share of time getting investor education. Like many new investors I’m starting out with wholesaling. Through my education journey I’ve learned of a few different methods or processes for wholesaling. I’m seeking help to streamline all the information I’ve gathered into a process that will work for me. I’m a somewhat confused and hope you will help. Obviously, insights from other wholesalers that are out there doing deals now is GREATLY appreciated.
Here’s my take on the wholesaling process;
- FIND A DEAL – that is a property I can place under contract for no more than 70% of ARV. How does my assignment fee factor into this? Should I be backing out my assignment fee from the MAO or does the buyer account for the fee from their 30%? I'm currently using direct marketing and driving for dollars to churn up leads.
- After finding a deal, I initiate a contract and be sure add “and or assigned" after my company's name (I'm using an LLC to protect personal assets against lawsuits). I was told to never give the property owner any money. Also, I can set the terms on how much earnest money will be put down and how long the home will be under contract.
- •THIS IS WHERE THINGS GET CLOUDY FOR ME. I’ve studied three different approaches and not sure which is the best/correct way to go.
- 1.Go to a title company, pay earnest money, close on property, then seek to wholesale it.
- 2.Go to a title company, pay earnest money, then find buyer (agree on property price and/or assignment fee), have buyer pay you an initial fee that will cover the earnest money I put down, assign the contract to the buyer, then send an invoice to the title company for the agreed upon amount of the assignment fee, get paid at closing.
- 3.Don’t go to a title company but find a buyer FAST (or have one lined up before finding a deal), assign the contract to the buyer, have the buyer handle the title company & earnest money, send an invoice to the title company for the agreed upon amount of the assignment fee, get paid at closing.
- Some advice I received from a title company: don’t make the assignment fee more than 6% of purchase price unless you have a really good reason asking for more (need clarity on this one). Their take on the process: 1) find deal, 2) Inspect property, 3) my company pays earnest money, 4) find assignee, 5) may get “assign money” when contract transferred, 6) Get paid at closing
Most of my training and personal study has explained the wholesaling process in broad steps. I’m really looking for some DETAILS in order to avoid blowing deals and learning the hard way.
I will keep it short because after reading too many books and articles it will just get you cloudy and confused.
A) Ignore the 70% rule, depending on what market you are in that rule is completely out-dated, if you can get a property under market value by any means, there is a profit in there to be made, do not try hit a home run every time at plate.
B) Any Seller that knows their head from their *** will not let you assign the contract and 99% of the time your offer will be rejected if you put that on there. So you will have to find a title company that will do a simultaneous close.
C) Remember, wholesaling is buying a property with other peoples money essentially. SO
Step 1: Put a property under contract, deliver deposit to title company to secure the property and officially be under contract. Make sure your inspection period is long enough to give you time to find a buyer
Step 2: Find a buyer to buy the property for more than what you have it under contract for. Align the closing date to be the same closing date you have on your contract with the Seller.
Step 3: Make money & repeat.
@Edward Payne, Wow! I am amazed at some advice that other investors give on this forum. I firmly disagree with @Chris Grenier on his advice to you. Here is what I actually do in two states:
First, find out what buyers are paying for rehabs. In utah and Idaho I find that rehabbers will pay about 80% of ARV minus repairs. The formula of ARV x .70 minus repairs = MAO (Maximum allowable offer) still applies but needs to be tweaked depending on the market. Most markets are hot right now and rehabbers will pay more. You also will be able to offer more to the sellers so you will have a better chance of getting more offers accepted.
Now that offer does not include your fee. So you should be offering less than the MAO. The minimum fee I try to get on every deal is $10K.
I am not a fan of writing your name or entity as the buyer and adding "and or assigns" to it. I use a REPC that makes it clear that the contract is assignable. I also create an addendum which includes again that the contract is assignable. I have a few disclosures that I include in every agreement stating I am a "for profit" company and I will either buy and fix this property, buy and hold it or sell it quickly for a profit. Not once have I ever been told "no" because I had an assignment of contract clause in my REPC.
As far as earnest money goes, it is up to you and the seller to agree what that should be. If you don't have the money for a significant earnest money deposit just put in the agreement that the deposit will be made with the Title Company within 7 business days. If you find a buyer by then have them deposit the earnest money with the Title Company. Always make sure to collect significantly more from your buyer than what you have agreed to give to the seller.
Once I have a purchase agreement on the property I go and order a title check. You can wait on this step until you find a buyer but I get it done right away. That way I know if there are any issues on title I need to deal with.
Once I find a buyer I send them an Assignment of Contract document. It states what I am charging for this Assignment (if it is a fairly significant fee you may want to consider doing a double close). They sign the Assignment and deposit a non-refundable earnest money deposit with the Title Company. I send the buyer the original contract and set them up to work with the Title Company. I send the Assignment and the original Purchase Agreement to Title with the names and phone numbers of both my Buyer and Seller.
I let the Title Company know I want the closings to be separate and that I do not want the seller to see the Buyer's side of the HUD1. I don't want the seller to know what I made on this deal. Send your wiring instructions or set up a time to pick up your check after the deal has funded and recorded. I suggest you don't even go to closing!
Don't get me wrong, you have to manage this whole process. You need to know the Title Company knows what they are doing. You need to instruct the buyer and seller to do what they need to do or else nothing ever gets done.
Hope that helps!
If you close (buy the property yourself) then re-sell/double close, wouldn't that then be flipping (not wholesaling), or am I just getting hung up on a technicality?
I think it's just semantics. IMO, wholesaling in general means buying low and selling high. Given this definition, double closing, assignments, rehabbing, and flipping are just all forms of wholesaling since one is buying low and selling high whether they fix it up in the middle or not.
I wouldn't get caught up with the way things are worded.
Originally posted by @Duane Ortega:
I think it's just semantics. IMO, wholesaling in general means buying low and selling high. Given this definition, double closing, assignments, rehabbing, and flipping are just all forms of wholesaling since one is buying low and selling high whether they fix it up in the middle or not.
I wouldn't get caught up with the way things are worded.
Words (semantics) matter very much. A wholesale never owns anything (just an intermediate between a seller and a buyer) whereas a flip or double close will create a chain of title, ownership however brief, and likely a taxable transaction.
Every decision leads to consequences somewhere and actions are even more so when not done with a full understanding.
Kudos to the OP for asking - - now only to await the dust to settle.
Thanks for joining this discussion and helping a newbie. The idea of buying and then wholesaling came from Than Merrill's "The Real Estate Wholesaling Bible." I guess at Than's level, he may buy the property as a means to open up different strategies (e.g. try wholesaling, if no luck, go to fix and flip, if no buyer, keep as a buy and hold). I like the idea of double closing with properties with BIG earnings. I'd rather not have the original owner knowing how much my company earned on the property while they're at the closing table.
Hey if you need financing let me know. I do transactional funding which you would need most of the time for your wholesale deals. I charge 2% on deals up to $250k anything over that is 3%.
Originally posted by @Jeff Rappaport:
@Edward Payne, Always make sure to collect significantly more from your buyer than what you have agreed to give to the seller.
Thanks so much for your advice and insights. Please help me understand the statement above. Are you referring to the earnest money?
@Edward Payne When you are wholesaling a property you have agreed to a contract with the seller. In that contract you have agreed to put up some earnest money. That may range from as little as $10-$100 to $500-$1000 or more. That is the money you are at risk of losing if you allow your due diliegence or contingencies in the contract to lapse and you do not perform on the contract. When I am now getting a contract (Assignment or another purchase agreement depending on my exit strategy) from my new buyer I want them to put up a non-refunable earnest money deposit. Now if they don't close on the contract I get their deposit. So, it makes sense to collect considerably more than what I have at risk. For example, if I put up a $1,000 em on a property I would collect $3-$5,000 non-refundable em from my buyer.
One other note to be aware of: The closing date for your buyer should be as soon as possible and have nothing to do with the closing date with your seller. For example, if I offered the seller to close within 30 days or less from the signing of the contract and I found a buyer on day two I would immediately ask how fast could they close. Typically, a week is plenty of time to close on a property that is around median price range of that area. Bigger projects may take a a little longer. However, I want my buyer to close as soon as possible. If there is a problem with the closing I still have time to either get it worked out or find a new buyer for the property. Never let the buyer close on the same time frame as you have with the seller.
Totally agree with Jeff Rappaport! I do the same in SC. Good info from this man and I would heed it.
Invest in good quality training. It is worth the money.
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@Jeff Rappaport THANK YOU...awesome advice, you are helping me tremendously.
@Paul Timmins THANK YOU for the book recommendations. I hadn't heard of those books, but they sound like exactly what I need to read.
@Account Closed are you referring to the high end training? e.g. "pay me $50,000 and I'll show you everything." I've been to some good training on the lower end of the price spectrum. Those training programs focused on strategy and developing the mindset of an investor. They didn't get into the nitty gritty.
Ed... no. Those like the one to which you referred are scams. This is a guy whom I have used myself who will work with you in your market place helping you set up your business, getting some deals in-the-hopper while he is there. Hands-on and legit.
Contact me privately if you are interested further. I know how hard it is to find the real from the illusionary in training in this business so I am glad to help.