I'm starting my adventure in real estate investing by wholesaling residential properties. My question is what are the best exit strategies if I get a property under contract but can't find a buyer? Am I able to back out at any time during my due diligence period? Thanks!
Nobody likes to back out of a contract. A deal is a deal, right? Nevertheless, I have a couple of specific contingencies in my Sales and Purchase Agreement that allow me to exit at will. "This agreement is contingent upon business partner approval" and/or "This agreement is contingent upon purchaser's ability to find a suitable funding partner within 60 business days" or whatever. That being said. We (my wife and I) have put over 100 properties under contract and have only exited the contract 5-6 times. Only one of those times was because I agreed to pay too much for the property. AND in that case, I told the seller from the beginning that I was not going to close on the sale and that I was not confident that my partners would be interested in his rural property. There were no hard feelings when we exited the contract 90 days later. The other 4-5 times were because the owner was deceptive and that deception came out in due diligence OR the owner was ignorant of some major title issue that we could not work through. The other 90+ times, we closed on the purchase or assigned the contract to a partner (end buyer) who closed on it. There are those who disagree with me, but I believe It is CRITICAL to get properties under contract a deep discounts, so we can offer them at wholesale prices or close on them ourselves. I don't like breaking a contract. Feels like breaking a promise. If you need help determining correct wholesale pricing. Feel free to contact me. I know the SC market and can help you. I also recommend that you check out Kent Clothier's "Reverse Wholesaling" instruction. A mentor recommended it to me and it helped me build the wholesale side of our business the right way. I bought the course in 2012, but I think most of it is available on YouTube now. Good Luck!
@Russ Scheider great post! I think you nailed it on many fronts. I also appreciated your take on an ethical approach to doing business, as well as following through on your commitment (the contract).
@Keegan Beck you asked about other exit strategies. You could return to the seller and offer a change in terms, for instance maybe a % of owner financing. While I dont feel it is fair to the seller to ask them for 100% owner fi (who already posted their property to you at a significant discount), perhaps you could bring several thousand dollars to them at closing and they could carry back the rest. This way they are at least seeing some capital off the bat. Another option is they rent to you with the option to buy (and first right of refusal), then you sublet the property to your end consumer. Again, since they are being such a team player here, I would maybe front load them 2-3 rent payments on day one. In my mind, thats the least you could do here putting some money in their pocket. Just make sure the TRUST factor is there. If they are being shady and not willing to reveal all the information you need for the deal, you may want to walk away.
@Dave Rav Makes some great points! way to get creative! Sometimes I am too focused on my favorite 2-3 strategies and forget that there are many ways to make a deal work. "When your only tool is a hammer, every problem looks like a nail" Great post, Dave!
Thanks @Russ Scheider and @Dave Rav ! I was specifically thinking about "oh crap, I can't find a buyer, now what do I do?" I've also heard finding the great deal is the hard part and that finding a buyer (if it's a great deal) is easier. I definitely agree with both of you on the trust and ethical point of view.
I feel sorry for anybody that deals with people that have to lie and defraud sellers.
@Keegan Beck If you're just starting out I'd suggest that you partner with a local cash buyer and offer to source inventory for them (for a fee).
This way you don't have to back out, worry about exit strategies, or @John Thedford .
Real Estate is a very small "business" community. If you get known as the guy who doesn't preform... You're going to make life really fun for yourself.
Thanks @Ryan Dossey . I'm currently trying to network with cash buyers here in the Charleston area so I'll at least have someone to call once I find a great deal.
FRAUD by inducement. I am just curious how you would feel if something like this was pulled on one of your loved ones. Would you consider it just business ? I am always less than amazed at the number of people posting on this website that see no problem with lies and deceit as a method of operation. I don't believe I've ever seen as many dishonest people as I have on BP that call themselves professionals.
Not sure who @John Thedford is referring to? Perhaps that post is meant for different conversation thread.
Nobody in the past 6-7 posts above is suggesting defrauding the seller. I've heard folks talk ethics. I've heard folks discuss a performance rate of 94-95%, as mentioned by @Russ Scheider , which is a pretty good rate of deal closure. I know with my practices, disclosure and explanation is big. (My primary ventures aren't wholesaling actually)
As a matter of fact, a service is being provided to folks in these uniquely complex real estate scenarios which often cannot be navigated by the "traditional" market.
And putting contingencies in contracts isn't fraud. If it were, then all the business I do in life is a bad deal for me - I am defrauded constantly by contracts for my cell phone, auto insurance, health insurance, flight reservations... I could go on and on. Have you ever read the fine print of these contracts - they are full of contingencies and "outs".
And what about when you have a deal under contract and a pre-approval by a financial institution, when about 2-3 weeks in, the underwriters at the bank report they cannot fund the deal for whatever reason? Are you a victim of dishonesty by the bank, just because the deal didn't go through? In some cases maybe, but most of the time you are not. It is perfectly legal for the bank to do their diligence and see that you meet all requirements. Or guess what- no deal.
Thanks for your understanding and lending an ear to my perspective.
@John Thedford well that's the problem, isn't it. The supposed "buyer" gets a property under a contract that he has no intention whatsoever to perform to (fraud in the inducement).
The "buyer" doesn't find a sucker for his contract and backs out, screwing the seller - and now the "buyer" (who was NEVER a real buyer) wants to back out of the contract he signed his name to.
That is as dishonest as it gets.
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