Purchase Contract and Settlement Sheet for a WholeTail Deal

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Purchase Contract and Settlement Sheet for a WholeTail Deal

Patrick Milia
Exton, PA · Member since 2012 · 15 posts · 4 votes

Hello, those with experience wholetailing please chime in, as I have not completed this type of deal before. I'm trying to wrap my mind around what the purchase contract and settlement sheet will look like on a wholetail deal with the end buyer getting a conventional mortgage. 

Here's the hypothetical scenario; house under contract with the owner for $200k. Once the purchase contract (with assignment clause) is signed between the seller and my investment company, I'm going to immediately list it in the MLS (I'm also a licensed agent) for $260k in it's current condition. The house needs a little updating, but nothing too crazy, and I have comps that would support a $280k to $285k ARV.

The end buyer is NOT going to be an investor, it will most likely be an owner occupant getting a conventional mortgage. Do I, now being the equitable owner, sign a new purchase agreement with the end buyer at the $260k sale price? Or am I just signing an assignment agreement with the end buyer that includes my approximate $60k fee?  What would that even look like on the settlement sheet? I feel like the buyers mortgage company would red flag that and not let the loan go through.

Alternatively, is a double close the only way to wholetail a deal to a buyer getting a conventional mortgage?

Your responses are greatly appreciated.

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Brent Hill
Investor · Charlotte, NC · Member since 2015 · 192 posts · 126 votes
9y

yes, you will have 2 contracts:  a "front end" beweeen you and the orginal seller and a "back end" between you and the new buyer IF you want to do a double-close with 2 separate HUDs.  I double close all my wholetail deals...closing costs are a little bit more but it is made up in the extra money earned by wholetailing it.

Your brokerage may not want you doing an assignement where there would only be 1 closing and 1 HUD and especially if no commissions are going to be paid.

If you do double-close you may have to hold the property 60-90 days to get around any possible lender seasoning requirements.

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  • Brent Hill
    Investor · Charlotte, NC · Member since 2015 · 192 posts · 126 votes
    9y

    yes, you will have 2 contracts:  a "front end" beweeen you and the orginal seller and a "back end" between you and the new buyer IF you want to do a double-close with 2 separate HUDs.  I double close all my wholetail deals...closing costs are a little bit more but it is made up in the extra money earned by wholetailing it.

    Your brokerage may not want you doing an assignement where there would only be 1 closing and 1 HUD and especially if no commissions are going to be paid.

    If you do double-close you may have to hold the property 60-90 days to get around any possible lender seasoning requirements.

    2Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    9y

    @Patrick Milia  "Do I, now being the equitable owner, sign a..."

    Even though you may have a contract and thus the first right of refusal, I am sure you do not have the status of an equitable owner - - your EMD is a condition for the contract and that's all.

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  • Patrick Milia
    OP
    Exton, PA · Member since 2012 · 15 posts · 4 votes
    9y

    @Brent Hill thanks for your response. It would be so much easier if the end buyer would be a cash buyer, but I doubt that's going to be the case at this price point. I would have to check with the brokerage, but I did plan on paying a real estate commission to myself (as the listing agent) and whichever agent brings the buyers. Thanks for the head-ups on lender seasoning; I did reach out to my loan officer and he is looking into it with his underwriters, but the initial thinking on the double close is I would have to wait up to 90 days to sell it to an end buyer, and I might even have to wait until day 91 to sign the new contract with the end buyer.

    Just thinking out loud here, but rather than sign a purchase agreement with the seller, I'm wondering if another option would be to sign an option to purchase with right to assign, then go to the courthouse and record a memorandum of agreement on the property. Of course I would let the owner I was doing this. Then I could list the house in the MLS, and the end buyer would have to sign a purchase agreement with the original owner. When the buyers title company checked title, the memorandum of agreement would come back and they would contact me for the payoff amount. Am I overthinking this?

    @Jeff B. I appreciate your response. My MLS defines equitable owner as "A buyer who has signed an agreement of sale to purchase a property is considered the "equitable owner" of the property from the time the agreement of sale is fully executed by both buyer and seller until the settlement is completed. An equitable owner does not have legal title to a property, but does have an interest in the property that can be sold. As far as the MLS is concerned, if an equitable owner wants to list for sale or lease his equitable interest in a property with a MLS member, the listing may be entered in the MLS."

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  • Mindy JensenPro Member
    BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
    9y

    @Patrick Milia , I'm glad this is a hypothetical and not an actual situation you find yourself in. $60k on a wholesale deal seems a bit high. I'm wondering if you could get in trouble with your state board for unfair advantage - knowing the market and taking advantage of a seller with such a price difference.

    I'm not in PA, so I don't know the laws there. Maybe an agent from PA can chime in? Have you spoken to your broker about this? I just don't want you to get in trouble.

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  • Lee S.
    Northern, CA · Member since 2014 · 674 posts · 444 votes
    9y

    @Patrick Milia Everything your doing is perfectly legal in California but I'm not sure about Florida. You do have equitable interest once you have a purchase contract. The MLS states "seller" and not "owner" when listing a property. I think you will be fine with a conventional or cash buyer but FHA needs seasoning. I have not done a wholetail deal yet myself but I've studied up on it as I do plan to use it when possible. I wouldn't do one without having the ability to close and possibly carry the property short term though.

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  • David Lichtenstadter
    Rental Property Investor · Northern NJ · Member since 2016 · 341 posts · 144 votes
    9y
    Patrick Milia I'm not so familiar with this in PA but my concern would be something else, using your hypothetical example that if you do a assignment that means that the end user has too dig out 110K (50K for 25% down + 60K assignment fee) so if he can get a similar house on the block for 260K with only 25% down that's only 65K out of his pocket, IMO it has to be significantly discounted that someone should buy it.
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  • Patrick Milia
    OP
    Exton, PA · Member since 2012 · 15 posts · 4 votes
    9y

    @Mindy Jensen Thanks for your response, and I appreciate your concern. I used $60k to keep the numbers simple, but I would also cover all the costs that a seller would normally pay for, namely the real estate commission and the sellers side of the transfer tax. So that would get the fee down to approximately $42k......I know, still a big number :) Then I would pay any back taxes the seller had, which would further eat into the profit, and all this is assuming a $260k sales price. Maybe a better option would be to say my fee is $10k, and whatever amount the house sells for over $210k the seller and I split the proceeds 50/50?

    @Lee S. Thank you. I have a commercial loan, hard money, transaction funding, and my own personal funds ready to go if I have to step in and purchase. The last thing I want is to ruin my reputation and not buy the house I say I'm going to buy.

    @David Lichtenstadter I understand what you are saying, but let me clarify. This wouldn't be an issue on a double close, but it could be a problem if I tried to assign it and the buyer was getting a mortgage. What do you think of my idea above of signing an option to purchase with the owner, then recording something that would show up on title? The buyers title company would call me for a payoff, and then that fee would come from the sellers proceeds.

    2Reply
  • David Lichtenstadter
    Rental Property Investor · Northern NJ · Member since 2016 · 341 posts · 144 votes
    9y
    Patrick Milia i thinks that it could me a issue on a double close because you have a mortgage involved, has it been a cash deal it would work well as a double close, Regarding recording the contract, that could definitely be done I'm not sure about PA but I'd discuss it with my attorney beforehand just too make sure that all moving parts should glide smoothly.
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  • Brent Hill
    Investor · Charlotte, NC · Member since 2015 · 192 posts · 126 votes
    9y

    I advertise mine on the MLS in Florida as cash only to avoid some of the problems you are talking about...hard money works too.

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  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    9y

    Nope, no assignment contract if the end-buyer is getting an Agency 30YF.

    You need to take full and literal no-weasel-words ownership of the property, recorded at the county and everything, before you can sell it to someone getting an Agency 30YF mortgage @Patrick Milia.

    There are transactional lenders who will lend to you, based on seeing the end-buyer's loan approval in lieu of your own personal credit/income/assets, so that you can check that box. It can be done, but your buyer will need to switch to a REI friendly Agency lender to do it.

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  • Chris K.
    Attorney · Nashville, TN · Member since 2015 · 1k+ posts · 1k+ votes
    9y

    Hi @Patrick Milia

    Few thoughts about your question:

    1. As you probably know, you will have to pay the realty transfer tax twice if you decide to assign the agreement of sale. It's also true if you want to double close.

    2. Is your broker okay with you engaging in wholesaling while also acting as their agent? That’s an important question to ask before you get into trouble with not only your broker but also potentially the Commission.

    3. Many PA wholesalers use what they call the “option” method. I think you more or less described it in your second post, but you can find more details about it by searching BP.

    4. If you intend to double close, many title companies will require you to actually close. You will need to check with your title company as to whether that’s the case. 

    5. As for the lender question, I would actually go talk to a lender about it.  Good excuse to network. :) 

    1Reply
  • Rick Pozos
    Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes
    9y

    I have done a couple of those type of deals recently. BUT I get a friend or relative to put some money down short term. They are charging a couple of points and 10%. They are in for about 3 months and make a pretty good return. I make a nice profit too. So, yes I close on the property. You could get hard money if there is that great of a return for you. If you gave up 7k or 8k for interest and your closing costs twice that means you will not go from 42k profit to 34k in profit. Still a whole lot of profit for no money down!!! I can honestly say that Ihave not had a deal that good when I did not do any rehab or money out of pocket.

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