Wholesaling real estate is the biggest craze since pants with pockets. A lot of people learn about wholesaling, then immediately want to get started. I mean, it’s very attractive to hear about flipping houses with no money or credit. However, what’s rarely mentioned is what information should be included in a contract. Let me first say I am not giving legal advice. I fudged by way through a business law class in grad school before dropping out. If you want legal advice, it’s in your best interest to consult with an attorney. You can ask for a referral from a fellow BiggerPockets member in your area, Google real estate attorney (your city) or get a referral from some one at your local real estate club.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
Out Clauses: The Due Diligence Period
As a wholesaler you want to make sure your contract has out clauses. A popular out clause is the “due diligence period.” I normally ask for 30 days, also known as the inspection period. I usually end up closing way before the due diligence period is over. However, I always give myself that cushion, even though at this point in my business, I close on 9/10 properties I contract.
Most contracts have a due diligence or inspection period built in. I give myself 45 days to close, with the first 30 days as an inspection period. I’ve seen contracts that last for 90 days, or even 120, and I’ve seen a news story on someone locking up a house with a “forever” closing date. Typically, we deal with single family homes, so in my personal opinion, if you’re giving yourself longer than 45 days, you are just wasting your and the home owner’s time. We are in the business of flipping over contracts, so don’t make it harder than it needs to be.
Now, the reason you do this is because you want to give yourself a period to shop around the property to cash buyers. And in the event you cannot find a cash buyer, you want to be able to legally be able to back out of the contract. Obviously, if you don’t do it legally, the home owner could possibly sue you or keep your earnest money if any was put up.
The Right to Renegotiate Price
A second clause that may be worth having is one that specifies a certain dollar amount of repairs, so for example, if the property exceeds $15k in repairs, I have the right to back out or renegotiate price. Instead of putting a dollar amount, you could also say something like, this deal is contingent upon partner’s approval.
I don’t use the dollar amount clause or the partner’s approval clause. I only use the first clause mentioned, which is the due diligence clause. Many people use the partner approval clause. Remember, once you lock up the deal, you have to get your buyers in the property. I personally educate the home owner that I have to get my money partners in the property because they have to approve the deal. In the event your buyers don’t bite, you can tell the home owner that your partners did not approve the deal. Or you can use the dollar amount clause but be careful with that because if you say it requires $15k in repairs and the home owner gets an estimate for $5k from a licensed contractor, you could potentially end up in court trying to prove who is right.
In conclusion as a wholesaler you want to do things legally, so be sure to have these proper out clauses in the contract. Simply not picking up the phone anymore is not a legal way to get out of a contract. I’ve noticed when I explain things to home owners up front, it’s never hard feelings when the worst case scenario happens. These clauses need to be explained to the homeowner prior to signing the contract so you don’t catch them by surprise. I tell the homeowner that my money partners and contractors have to get into property to approve the deal before contracting the property. That way, it’s no surprise if I have to get into a property 3 or 4 times. Ultimately the cash buyers are your money partners because without them, the deal does not get funded. Again, if you have further legal questions about the contract or process, you should contact an attorney.
Wholesalers: Which contract clauses have saved you from bad deals?
Be sure to let me know with a comment!