Accidental Wholesaling for beginner investor

11 Replies

Hello all,

I am a fairly new buy-and-hold investor based in Orange County. I consider myself new because I've been investing for over a year and have own three properties so far with my business partner. Long story short, I stumble across a deal that I found on facebook in the zip code 92105 San Diego, CA ( I will post details on how I found it if I successfully execute the deal). Due to my current situation, limited time and capital, I plan to wholesale this deal. The seller and I are going to sign purchase agreement in less than 2 weeks. The seller is an out-of-state investor who wants to sell his house to invest somewhere else and can only stay for 2 weeks in San Diego to complete the transaction. Needless to say, I have to close the deal in two weeks.  However, I am completely new to wholesaling as I have never done this before. I generally know what it is but I don't know what steps to take, what kind of paperwork I need to prepare. I plan to assign the contract but I have not found a cash buyer yet at this moment. Here are the questions I've been pondering:

1) Where do I go to find cash buyers ? ( local fb real estate groups, forums ...etc )

2) Once I find a good title company that has experience with wholesaler, do I let the title company guide me on the paperwork during the transaction ?

3) This question gears toward experienced wholesalers, what tips do you have to communicate with both seller and buyer to ensure a smooth transaction that makes both parties happy ?

4) What resources (books, podcast, blogs, forums) do you recommend me read to supercharge my knowledge as I have less than two weeks to prepare for this deal ?

I thank you kindly in advance and look forward to connecting with other like-minded investors.

Best,

Leon

Originally posted by @Leon Lai :

Hello all,

I am a fairly new buy-and-hold investor based in Orange County. I consider myself new because I've been investing for over a year and have own three properties so far with my business partner. Long story short, I stumble across a deal that I found on facebook in the zip code 92105 San Diego, CA ( I will post details on how I found it if I successfully execute the deal). Due to my current situation, limited time and capital, I plan to wholesale this deal. The seller and I are going to sign purchase agreement in less than 2 weeks. The seller is an out-of-state investor who wants to sell his house to invest somewhere else and can only stay for 2 weeks in San Diego to complete the transaction. Needless to say, I have to close the deal in two weeks.  However, I am completely new to wholesaling as I have never done this before. I generally know what it is but I don't know what steps to take, what kind of paperwork I need to prepare. I plan to assign the contract but I have not found a cash buyer yet at this moment. Here are the questions I've been pondering:

1) Where do I go to find cash buyers ? ( local fb real estate groups, forums ...etc )

2) Once I find a good title company that has experience with wholesaler, do I let the title company guide me on the paperwork during the transaction ?

3) This question gears toward experienced wholesalers, what tips do you have to communicate with both seller and buyer to ensure a smooth transaction that makes both parties happy ?

4) What resources (books, podcast, blogs, forums) do you recommend me read to supercharge my knowledge as I have less than two weeks to prepare for this deal ?

I thank you kindly in advance and look forward to connecting with other like-minded investors.

Best,

Leon

You can start with local investor groups. You should be going there anyway to meet, learn, share, and possibly drum up deals. If your deal is good, you should have no problem finding an investor to snatch it up. 

Another option is to become a PRO member on BiggerPockets and advertise your deal on the marketplace. Again, there are investors watching your market and looking for good deals all the time.

Yes, you can use a Title company to handle the paperwork. However, they are just paper pushers. They can explain a form and tell you where to sign but they're not advising you on the consequences of the transaction. I recommend you work with a REALTOR or attorney with personal experience as an investor.

As for the last two quetions, dedicate a couple days to reading the blogs and forums. There's plenty of information here for free.

 

@Leon Lai you should definitely use an attorney to advise you on the laws and handle paperwork etc as wholesaling is actually considered brokering in some states like CA if you do so many transactions so you need to understand the laws and process there. 

That being said the best ways to find cash buyers is networking at local REI meetups, masterminds, Facebook groups, Realtors, title companies, closing attorneys, property management companies, auctions, Craigslist, bandit signs, google search etc.

You can search real estate transactions in your tax database. Look for entities and individuals that have bought multiple properties. You may need to search by the address of the buyer as they may change their name or the name of the entity on each purchase.

You can also buy lists from companies like list source and subscribe to software that will show you who the cash buyers are. You can skip trace addresses with a service like datazap and calm them up.

Again make sure you research the laws CA and discuss with an attorney so you don’t break any laws.

@Leon Lai , it's really not that complicated but can seem to be. I'll give you and the others an overview. I have wholesaled properties in San Diego, but don't anymore because I found it stressful.

Here's the simple steps to it. Get the house under contract. Using a simple 1 or 2 page purchase agreement is best. The purchase agreement is assignable unless stated in it that it is not, but most wholesalers put "John Doe and/or assigns" as the buyer. Explain to the seller that you are likely going to bring in a partner and that you might buy the home in an entity or your partner's name.

Then find an  escrow company and a title company that understands and allows you to assign the contract or do a double close. If you double close you have to buy the property and then immediately turn around and sell to your end buyer. This way is easier because you are the actual buyer from the seller but it will cost you more money. This is often referred to as an A to B & B to C transaction (You're "B," seller is "A" and end buyer is "C").

Next, find your buyer and either assign the contract to them or do another purchase agreement with them to buy it from you. A double close will require you to open a second escrow and pay all the associated fees. You should use the same escrow and title company for both transactions. The final step is to either have your buyer close your purchase if you have assigned the contract to them or complete the double close.

You get paid either from escrow when everything is done or directly from your end buyer outside escrow. Good luck; timing is everything when wholesaling.

First step for me is to verify I am dealing with the owner, especially if things smell a little fishy like this.  I'm out of area travelling. Send me a check and I'll send you the keys. LOL   

Check the county assessors site. While there see who owns it, when they bought and how much they paid. Then look up recorded docs on the parcel # to see liens and encumbrances.  

Get good at these steps and it will only take a couple minutes to do a preliminary title search on all properties going forward as automatic after criteria screening.

Which contracts, how to find buyers, etc are all details.  First inform yourself and protect yourself with the 2 above steps 👍

@Leon Lai Bruce summed it up nicely.  The one thing I saw not mentioned is your margin on the deal - a double close allows you to keep that amount private.  An assignment means your buyer will know.  Other folks who do this regularly I'm sure could offer more details earned from daily experience.

There's basically two flavors of a deal:

(1) The person you are wholesaling to is trusted, either because you already have a relationship with them or because they are known in the investing or business community and their reputation is critically important to them.

(2) The person you are wholesaling to is not trusted. The person is new to REI or you're transacting from afar or they screwed people in the past.

It makes sense to protect yourself as much as practical, of course, but it often requires you to spend more $$ if you want to buy more trust.  Meaning, you'll pay attorney fees, additional escrow and title fees, complicate the situation with the seller, etc in order to protect yourself more.  If you're dealing with someone in the (1) category, you don't need to buy more trust and so the transaction can be more efficient and your profits can be higher.  That goes for wholesaling and just about everything else in business.

[Solicitation Removed by Moderators]

Originally posted by @Bruce May :

@Leon Lai , it's really not that complicated but can seem to be. I'll give you and the others an overview. I have wholesaled properties in San Diego, but don't anymore because I found it stressful.

Here's the simple steps to it. Get the house under contract. Using a simple 1 or 2 page purchase agreement is best. The purchase agreement is assignable unless stated in it that it is not, but most wholesalers put "John Doe and/or assigns" as the buyer. Explain to the seller that you are likely going to bring in a partner and that you might buy the home in an entity or your partner's name.

You get paid either from escrow when everything is done or directly from your end buyer outside escrow. Good luck; timing is everything when wholesaling.

This is common advice and common practice, however, not exactly legal or above board. First off, if you intend to wholesale the property, have no intention or means to close on it if you can’t find a buyer, then you are required by CA disclosure laws to disclose this info to the seller. Telling them you may need to bring in your “partner” when you don’t have a partner or that you may buy the home in another entity is fraud as neither are true. I’m not sure why people continue to advise others to break the law just to make a buck but I think a large Partow it can be blamed on the gurus who package and preach this garbage for fees.

As to the last paragraph, NEVER get paid or pay a wholesaler outside of escrow, you are only asking for trouble and inviting risk if you are the buyer.

There are many ways to perform a wholesale transaction legally and ethically and none were mentioned in this post. Assigning the contract in CA without holding a license is brokering without a license punishable by fines, jail, restitution, or all of the above. This is assuming you as the wholesaler negotiated price with a seller, publicly marketed the property (or the contract) for sale, located a buyer, then got paid for said services.

A double close to wholesale is fine and legal so long as you informed the seller that you intend to immediately resale the property for a profit, that you closed on the deal, took title, and THEN marketed the property for sale as the new owner and sold it, you have done a legal transaction. With that comes a lot of costs though.

You can get licensed, that makes it legal too but you still must disclose everything CA requires you to disclose and must not lie to the seller claiming partners or the like.

You can have your buyer already, then actual partner with that buyer, form a new entity with you both as shareholders/owners, and in escrow and at closing, sell your ownership shares to your buyer for your “wholesale fee”. Perfectly legal there too as you are the actual buyer from the start and are merely selling a newly formed business which will hold title to an asset. Similar process can be accomplished using a trust. No double escrow costs, no transactional funding needed, no lying to the seller, all above board.

To the original poster, why would another investor want to sell their investment property to a wholesaler for well under market value? As an investor, we make every attempt to monetize every investment to the best of our abilities. Selling to a wholesaler in the format suggested above is not a real buyer and even if he were, the seller would have to sell at a major discount for it to make sense for the wholesaler a AND that wholesaler’s buyer. Stands to reason that will not happen.

I would refer this investor to a qualified and experienced real estate agent to get the job done. Perhaps bank some love from that agent for some future discount on a transaction you perform with him or her. Don’t expect a referral fee though, that is a violation and the agent could lose their license paying a referral fee to a non licensed party.

Thank you @Nathan G. ,@Greg Dickerson , @Bruce May , @Steve Vaughan , @Justin R. @Will Barnard for your inputs. Based on your recommendations, I think the next step for me is to consult with a real estate attorney to make sure I am not breaking any laws. CA is known for having strict laws compared to other states, so I don't want my first deal to ruin my career. 

A little more details about this seller, they are a married couple who are doing real estate in south east asia, they told me they needed to sell this house to get some cash for their business. so they are willing to sell it for cheap. I asked a friend of mine ( who is a new real estate agent) to pull a report on this house I found their name on the title. I am pulling records from the county tax assessor to confirm their names and look for any liens or obligations. Then when I meet them to negotiation, I will try to confirm if they are the people on the records I found.Is there anything else that I can do to help me identify if  I am dealing with the real seller ?

I also found that this house is coded as Zone R2 which is mix commercial and residential use. I went over to look at the house on the outside ( I was not able to see the inside). Here is what I found.

 The house used to be a typical residential property 3bed 2 bad. However, a few years ago, the seller rehabbed it and converted it into (what look like) a medical office. This is confirmed when I found pictures of the inside on loopnet. The floor plan clearly looks like it is a medical office but pictures look like this office was not fully built yet.

My back-up plan is to borrow hard money to close the deal with cash then immediately  turn around and sell it for cash to a flipper. I am willing to have a small margin as I am not familiar with this neighborhood and I live too far to manage it If I want to keep it. What are the pros and cons of this strategy ? Is there anything I need to watch out for in terms of real estate laws ? 

Because of this weird floor plan, will it have any implications on when I advertise it to buyers ? I plan on using a broker to help me sell it but am I gonna advertise it as residential or commercial property ? 

Leon, R2 zoning is multifamily residential, not commercial mix so I am guessing this conversion to medical offices was not done legally or with permits.

I would check all permit history on this property in addition to your other due diligence.

I would also suggest locating a buyer in advance, it will give you many more options with this.

Assuming I am correct and this is R2 for multi family only, then the current layout will be a negative factor in the value and would need to be converted back to a home or small multi.

Originally posted by @Leon Lai :

Thank you @Nathan G. ,@Greg Dickerson , @Bruce May , @Steve Vaughan , @Justin R. @Will Barnard for your inputs. Based on your recommendations, I think the next step for me is to consult with a real estate attorney to make sure I am not breaking any laws. CA is known for having strict laws compared to other states, so I don't want my first deal to ruin my career. 

A little more details about this seller, they are a married couple who are doing real estate in south east asia, they told me they needed to sell this house to get some cash for their business. so they are willing to sell it for cheap. I asked a friend of mine ( who is a new real estate agent) to pull a report on this house I found their name on the title. I am pulling records from the county tax assessor to confirm their names and look for any liens or obligations. Then when I meet them to negotiation, I will try to confirm if they are the people on the records I found.Is there anything else that I can do to help me identify if  I am dealing with the real seller ?

I also found that this house is coded as Zone R2 which is mix commercial and residential use. I went over to look at the house on the outside ( I was not able to see the inside). Here is what I found.

 The house used to be a typical residential property 3bed 2 bad. However, a few years ago, the seller rehabbed it and converted it into (what look like) a medical office. This is confirmed when I found pictures of the inside on loopnet. The floor plan clearly looks like it is a medical office but pictures look like this office was not fully built yet.

My back-up plan is to borrow hard money to close the deal with cash then immediately  turn around and sell it for cash to a flipper. I am willing to have a small margin as I am not familiar with this neighborhood and I live too far to manage it If I want to keep it. What are the pros and cons of this strategy ? Is there anything I need to watch out for in terms of real estate laws ? 

Because of this weird floor plan, will it have any implications on when I advertise it to buyers ? I plan on using a broker to help me sell it but am I gonna advertise it as residential or commercial property ? 

That zip code (92105) has several CUPD zoning areas and other plan overlays that allow for local retail use in addition to the official residential zoning.  Primarily, this is along Fairmount and El Cajon Blvd corridors.  There are some other streets.  In general, office use is common and likely permissible by the City.

The "R2" that is shown in the CRS and MLS listings is an indicator but otherwise pretty useless since that data is coming from the County and the City is the one who determines the zoning here - their designations are far more complex. Lots of details to review in order to give further guidance.

There is also a local investment club in Irvine called invest club. They could be an excellent resource for you .

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