How does Wholesaling work??
Hello everyone
I'm trying to wrap my mind around the inner workings of a wholesale deal and I was wondering if you could enlighten me.
I understand that a wholesaler finds a deal and the puts it under contract with the intention of selling the contract to someone else for a small profit. But I'm just wondering how the process works? A few questions I have are...
Can you finance a wholesale or are they cash only deals?
When a wholesaler contacts you with a deal how long do you have to evaluate it?
Do you put a deposit down for the wholesaler to hold it for you?
If the contract is under the wholesalers name how do you transfer it to you?
Any information you could offer would be fantastic. I want to understand more about this avenue of real estate before I even consider getting involved with it. Thank you very much for any response!
First of all don't assume it's marked up for a small profit. Sometimes it's a huge profit. I'm going to try to answer these in order:
No, you will need to pay cash, unless the wholesaler has a very special relationship with the seller.
Depends on how good the deal is. For good ones it could be a few hours, if it's a bad deal (95% of them), you will have weeks and weeks of it being emailed to you.
Yes they will require a deposit. You're better off putting it at a title company, but the good wholesalers may require you to make it out to them.
They either assign the contract to you, or they will close on the property first and then resell it to you.
Some of these depend on your relationship with the wholesaler.
First, almost always it is a cash only deal. Part of the reason investors can buy properties directly from sellers for below market value is they close with cash. First, this eliminates inspections to get a loan. If a deal requires a new roof, HVAC, etc then you might not get a loan anyway. Second, speed. I can close the day I get clean title if I use cash. Closing costs are much cheaper. When you buy an off market property at a discount these things are factored in. You should be able to pay cash.
If you have not worked with the wholesaler before, he probably contacted you and 100 other people at the same time. Whoever writes the check and signs the deal first gets it. It might be 20 minutes and it might be 20 days (though like @nick said this means the deal probably sucks) . Again, the primary reason sellers work with investors is SPEED! They sacrifice some equity to sell their house fast. If they were willing to wait 6 months they would fix it and list it.
Yes you put down a deposit, especially if it is your first time dealing with the wholesaler. You put this down WITH A CONTRACT so he is now obligated to hold it for you due to the contract. Do not give anyone money without a contract (unless you know them and have worked with them before, it is still not the best idea but I have done it and I am sure others have too). If you have a good relationship it probably would work the opposite way, they will hold the deal for you without a contract or money.
-Is the contract under your name? There are 2 ways to handle this. Some of it depends on what state you are in. One option is an assignment. Say the wholesaler has the deal under contract for 60k. You are willing to pay 70k. You can do an "assignment of contract" for 10k which basically means you agree to close on his contract and he gets 10k when it closes. The contract for the property will be the original contract the wholesaler and seller signed. Your name and the wholesaler's name will be on the assignment contract. The advantage of this is there is only 1 closing cost and the wholesaler does not have to provide funds to close. You wire in 70k and that is all that has to happen. I guess a disadvantage is the seller can technically see what the wholesaler made, but honestly they don't care (a lot of people fail to understand the seller a) understands you are in this to make money and b) does not give a darn what you make)
The other option is a double close. In this instance you sign a separate purchase and sale contract with the wholesaler. When it is time to close, the wholesaler buys the property first from the seller, then immediately (or a day later or whatever) sells it to you in a separate transaction.
Advantage:
1. No one knows what the wholesaler makes right away (you can figure it out later on the county tax site). Of course no professional cares what the wholesaler makes.
2. In some states I think this is on stronger legal ground, but I do not know how every state works.
3. It generally is an easier transaction. It removes concerns the buyer (you) won't perform. If the wholesaler has to close then you disappear he still has the property, which if it is a true deal is a good thing.
Disadvantage. There are now 2 closing costs. Wholesaler has to find and provide funding to close if he does not have the cash. It takes longer, sometimes you have to wait a day to do the 2nd part (not significant of course).
An aside, you should never care what the wholesaler makes. If it is a deal for you then that is all that matters. I don't know anyone who is successful in this business who cares what a wholesaler makes. I know I do not give a crap.
Thank you guys for the detailed responses! Really helps clear things up for a new investor!
@Tyler Kirk are you starting up some wholesaling in Pleasant Hill? I worked as a wholesaler in San Jose for about 6 months before recently moving to Walnut Creek as an Agent. If additional questions about wholesaling come up feel free to reach out to me and we can grab coffee sometime ! Good luck investing :)
Take into account that a wholesaler that makes more than 6k-8k per deal may be required to get a transactional loan per their HML. We do not lend in CA period, but that is another way to wholesale the deal without the end buyer knowing your profit and to make sure they don't screw you out of our assignment fee. I am doing a deal the end of this month where the wholesaler is making $120k profit for one deal. If the end buyer knew the wholesaler was making that much profit there would be a lot of headaches involved, no matter what kind of deal they were getting.