Why/how do wholesalers not actually own the house?
Phoenixville, PA · Member since 2017 · 8 posts · 1 vote
How does someone wholesaling not actually ever own the house or have to pay expenses? What is the difference between them buying it and me buying it?
It's called contract assignment - they're selling YOU the right to take their position in a P&S contract. It's a common business practice, though often done wrong by wholesalers.
They've entered into a P&S contract with a seller. This gives them "equitable interest". They then can exercise an option to assign their position in that contract to someone else, preferably with the seller's knowledge and permission. As long as everyone agrees, there's usually no problem.
The wholesaler assigns their position in the contract to an end buyer. The end buyer closes with the seller and pays the assignment fee out of their (the buyer's) funds at closing.
In some states which are wholesale averse, it's often necessary to do what's called a "back-to-back" closing. The wholesaler completes the purchase from the seller using transactional funding, then sells to you when that closing is complete. The wholesaler takes profit from a small markup agreed to with the end-buyer in course of negotiations.
Hope this helps.
For example, at no time should you ever tell the seller you are closing on the property without the means to actually do so (that is fraud). However, there is nothing wrong with backing out of a deal as long as you have your contingencies in place (loan provision, property/termite inspections, etc.)
Honesty is always the best policy. If you plan on assigning the contract, let them know upfront. A simple, "...after closer inspection, this property isn't necessarily my cup of tea. But I may have a colleague or two who would be interested, is it OK if I show it to them?"
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There is something wrong with backing out of the deal if the real reason you want to back out is you cannot find a buyer. If you sign the deal knowing you have no intention of closing, even if you do have the means, that is still dishonest. Gurus preach having all these contingencies with a wink and a nod like "subject to partner approval." This is in almost every contract anyone uses even if you are a single member LLC and there is no partner. I heard some guru says something like "put a termite inspection clause in there, then if you can't find a buyer you can get a clean termite inspection and say you only wanted a house with termites." 1) Good luck in court and 2) good luck looking yourself in the mirror if you try that garbage.
You are correct about being up front if you assign it. A lot of people who are not wholesalers but post on this subforum all the time can't grasp that the seller flat out does not care if you assign it or sell it to someone else. As long as you tell them something like "hey, I work with this guy Johnny Investor sometimes, I think he might buy the house, I'll bring him over to see it and you can meet him" (note: don't let the seller meet Johnny Homebuyer if he is not someone you know is a professional and you are already 100% sure he will close) . The seller will not care if you assign it. Or if it seems like you have the rare seller who will care, just double close and call it a day.
At the end of the day, the seller cares about 2 things.
1) The deal closes
2) Whatever check they are handed at closing is for the amount you told them it would be when you signed the contract.
They don't care if you sell it the next day, rent it, spend 200k rehabbing it, burn it down, drop a bomb on it, paint it purple, or let it sit empty for 9 years. They care about 2 things. It closes and they get paid what they expected to get paid.
Wholeheartedly agree with you, Eric F.
The, "weasel escape clauses" are not in my contracts, nor do I advocate their use. For sake of brevity, I didn't go to a lengthy explanation but wanted to make the point of being honest and ethical when dealing with sellers and investors (cash buyers).
That being said, I think we can all recall doing our first deal and having the big cloud of uncertainty hanging over us. I'm not sure where the OP is with regards to their investing career, but I wanted to reassure them that escape clauses do exist and should be used when the situation arises.
But to reinforce your point, wholesalers should not use escape clauses to back out of deals. It's not an honest or ethical way of doing business and it's not good for wholesalers or RE investors in general.