Costa Mesa, CA · Member since 2019 · 8 posts · 0 votes
In a wholesaling agreement, is it possible to add a contingency clause to back out of the contract if you are unable to secure a buyer in the allotted period of time?
I thought maybe you would like a response to this.
To start, @John Thedford has somewhat of a point. You want to go into a deal with a pretty good level of confidence that you can find a buyer. In fact, you should already have a growing buyers list. Some will say that the buyers will be there if you have a good deal, and that may be the case, but you really do need to know how to get to them. I suggest lots of networking with local rehabbers and landlords. If you tie up someone's property without having a chance of closing the deal, your not being fair to the seller, and you're perpetuating the negative view of wholesalers.
Next, you have to make sure it's a good deal for your buyer. You need to have good comps and a good estimated ARV. You also need to have a good estimate for what the buyer is going to have to put into the property to bring it up to that value. And, then, you need to make sure that you can offer it to them at a price that works for them. This is generally 70% of ARV minus the repairs. If your numbers are way off, you're going to start building a bad rep and no one will want to work with you.
Finally, to answer your question, you should have a contract that has appropriate contingencies built in. My contracts specify that I have the right to have the property go through a number of inspections, and that my obligation to execute is contingent on the results of those inspections. This is fair in that if something is uncovered that makes the deal go south (crumbling foundation, infestation with aliens, etc.) then I shouldn't have to execute the contract. While I could pull out of a deal with such a contingency, you don't want to be entering into contracts only to pull out because you can't find buyers.
There are a lot of buyers out there looking for good deals. If you find them, they will want them. Just don't force the deal. Don't underestimate repairs. Don't overestimate ARV. Don't trim the buyer's profit. All of these things will insure that you have a bad deal and won't be able to close.
Again, be prepared. Go in with confidence that you can close the deal, or don't go in at all. You're doing the seller a big disservice if you tie up their property and then dump them. You have to understand that you go into this to help the seller, help the buyer, and then make a profit.
Oh, and know the laws in your state. You should already be working with a lawyer, title company, realtor, etc. They will know what you can and can't do.
Costa Mesa, CA · Member since 2019 · 8 posts · 0 votes
7y
@Barry Pekin
Thank you for the informative answer. I am new to this and had some fear behind making the mistake of locking myself into a deal where there was significantly more damage to the property then meets the eye.
Rental Property Investor · Richardson, TX · Member since 2019 · 120 posts · 82 votes
7y
@Gianluca Carella I couldn’t agree more with @Barry Pekin on this. Stick to your numbers as they should dictate the deal. If you try to force the deal by manipulating the numbers you will struggle finding buyers for your deals. Trust me I have done this when I was going through a slow period and forced a deal and it did not work out. Its better to walk away from a deal then force the numbers just to get a deal.
If the numbers are not great see if there are other creative options to make the deal work like a “subject to”. Many deals will not fit in the standard wholesale box so its important to have other options.
Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes
7y
I will say this as a past customer of a whole seller. Most of them are just jerks. If they do not have a buyer they string the homeowner out as long as they can and then also ask to reduce the price of the house, and then they just walk away. The homeowner really has no recourse. They really can not sue in court to force the sell and the whole seller generally has no way to pay for the house anyway, no matter what lies they said to get the contract. Fact is the whole seller contracts are so one sided they do not even have to escrow a deposit for the home owner to get for the whole seller's default.
I'll give you an example with what happened for me. A house valued at $240k, by the assessor's office that was just reassessed at actual value due to the property transfer to me (inherited). Initially whole seller said $189k, which I agreed to only because I was getting a contract for them to buy both properties. Both properties were fully livable, and had been lived in immediately prior to their sell, everything worked, but some things dated. Signed paperwork for the other property, then he pulled out this property's paperwork, and now there must have been a misunderstanding as its $169k. No, no misunderstanding, but I went with it to have both sold within 30 days. 30 days come and go, no closure on either property.
Then they want to reduce the price by $25k for the other property and this one to $89k. The other one I said ok to, if the could close within a few days. Yes they could. This one, no way. I asked them to cancel the contract with this one for their non-performance. That took almost 2 months for them to do, and they never did remove their lockbox on the gate.
I listed that house and it sold for $225k in less than 30 days it was in escrow, closed escrow in less than 30 days with an FHA loan!
Oh, and the other house, they sold it to someone and took a took a $55k for their role in whole selling. So, if they kept the price they agreed to, they would have made a profit of $30k. I would think that was enough!
And I still receive post cards from these jerks, wanting to buy the property they already whole selled and the one they defaulted on!
So, if you do not have buyers for the property, please do not enter into a contract to buy it. The sellers are using a whole seller for a reason, and generally it is because they want a fast sell!
Costa Mesa, CA · Member since 2019 · 8 posts · 0 votes
7y
@Lynnette E.
Thank for your input that was really helpful. I’ve actually spoken to buyers who have told me this before. I intend to stick to the formula and have actually been focusing on finding buyers, understanding their needs, then trying to find the deals they are looking for.
I’m sure if the deal makes sense buyers will come.
I’m just learning the ropes here and trying to get my first one.
I actually purchased a property from a wholesaler before and got a great deal. I didn’t mind him making 30k on the spread as he got the property for a steal.
Raleigh, NC · Member since 2011 · 721 posts · 343 votes
7y
Always be transparent with the seller. Don't tell them that you're going to buy the property when you know that you are not. Tell them what you are going to do. They will appreciate it, you will sleep better at night and it's simply the right thing to do.
Investor · Houston, TX · Member since 2017 · 1k+ posts · 871 votes
7y
Go get qualified to buy the place, and buy it. Work with hard money lenders in your local area, or private lenders, or banks or whatever. I see in your case you have done a project before so you get it.
Now if it works out that you can assign it to a fellow investor, great. I think that is how this whole assignment thing came about anyway - investors in a given area run in herds and work together. I got zero deals right now, and suddenly you got two (or three), so hey man, can you spare a project? I'll pay you some kinda fee for it... you keep the deal you want, and offload the other one (that I like). Houses get bought and sold, and projects get done.
The concept of doing assignments is not wrong, and it certainly isn't illegal, but the idea of writing contracts that bind you to obligations you cannot meet, well... that's not how most people would prefer to operate. The contingency clause still has a place -- unforeseen stuff comes up during inspections -- but it shouldn't be the primary focus of the whole strategy!
I think it is possible to do wholesaling the right away, but it's really hard to do. I think it is actually easier to just get the funding and buy the houses. Partner with other investors if you need to, but running around like a moron trying to line up buyers while a clock is ticking, that to me is making life way too hard.