I’m not going to lie, I’m extremely frustrated today.
I’ve mentioned in other articles that in my nine years as a real estate investor, I have never assigned a contract. Well, that was true until a week ago, and boy, I will never make that mistake again!
Assigning contracts is honestly a stupid business model. I’m sorry to put it out there like that, but it’s true.
As a wholesaler, I want to officially lay out the contrast between what 99 percent of people do and what the top one percent does when it comes to wholesaling real estate. And after today, if you’re a wholesaler, I don’t want you to EVER do the former again!
How to Purchase Real Estate With No (or Low) Money!
One of the biggest struggles that many new investors have is in coming up with the money to purchase their first real estate properties. Well, BiggerPockets can help with that too. The Book on Investing in Real Estate with No (and Low) Money Down can give you the tools you need to get started in real estate, even if you don’t have tons of cash lying around.
The Story Behind My First Assignment
There was a property that had some pretty interesting things going wrong, and I really didn’t want to deal with it anymore.
The seller was a little sketched out and had backed out twice already (and then came back and wanted to proceed), and I was just kind of done.
So I decided I’d assign the contract, even though my original intent was to follow through with the purchase. But as things progressed, it was really clear it wasn’t something I wanted to close.
I approached an investor buyer who I’ve worked with before and who lives in my state. I thought assigning the contract would all go fine, but then closing day came, and the money hadn’t been wired to the title company.
I had told the seller that we would close on Friday, and so she shows up and doesn’t get a check!
Who do you think got yelled at because of the actions of this investor-buyer?
Now, don’t get me wrong. I work with this end buyer a lot, and he has always come through on deals, but because of some issues with the wiring process, the money didn’t get to the title company in time for closing.
Whose reputation was on the line, though?
It was me and my company.
You see, assigning contracts is just as if you were to tell your girlfriend you want to marry her and on the wedding day, she finds out you got paid to hand her off to some other guy.
What Are the Alternatives?
When it comes to wholesaling real estate, a lot of newbies don’t even know that alternatives to assigning contracts are available.
I want to take some time to outline these different alternatives and then open the hood of my business and let you know what I do.
So with that, let’s begin with what assigning a contract actually means:
- Assignment: When you get a property under a purchase agreement between yourself and the seller and then go find an investor buyer to whom you sell the contract for a fee.
- Double Closing: When you get a property under a purchase agreement between yourself and the seller and then actually close and within the same day, resell it to an investor-buyer.
- Closing and Then Reselling Later: When you get a property under a purchase agreement between yourself and the seller and then actually close. Then once it’s yours, you market it and resell it as-is.
- Whole-tailing: When you get a property under a purchase agreement between yourself and the seller and then actually close. Then once it’s yours, you do minor repairs and clean up, market it and resell it as-is.
Why Assignment is the Worst Option of the Four
The truth is it’s because the assignment of a real estate contract the way most wholesalers do it is illegal.
Now, I’m not a lawyer, but feel free to check out this incredible interview of someone who clearly demonstrates why wholesaling (again, the way most do it) breaks real estate and contract law.
Disclaimer: This interview is state specific, and I do not benefit in any way from you watching this interview, nor do I have any affiliate relations with the website associated with them.
You cannot enter into a purchase agreement without the honest intent to purchase the stated property!
After you watch the video, it’s pretty clear that if you’re “tying up a property” with the sole intent to sell the contract to another investor, you’re straight up violating the law.
Additionally, it’s a horrible business model to base everything on this type of wholesaling strategy, even beyond the legalities of it.
When you assign a contract, you’re forfeiting your control. When it came to my situation with the property last week, I was left looking like a scam artist, all because this other investor was irresponsible.
Now, to his benefit, the funds did end up coming in, she got her check and everything ended up working out the following Monday — but what if it hadn’t?
What if this guy just randomly decided to back out?
All it takes is the seller (who got my direct mail) to tell her friends that I’m a fraud, who will then in turn tell their friends and so on, and the reputation of my business would end up in shambles!
Your reputation is EVERYTHING in this business, and I can’t afford to have it dependent upon the actions of others.
Another thing is that when you assign a contract, you have to disclose to the investor-buyer how much you’re making on the transaction.
If you got a grand-slam deal, say, a property with an ARV of $100,000 for $20,000, only needing cosmetic repairs of $10,000, and you sell the contract for a fee of $15,000, even though there is plenty enough spread for the buyer (he’d be getting it for $30,000, plus $10,000 rehab, meaning his profit would be $50K+), he might think you are a chump for trying to make a $15,000 wholesale fee. Or he might not, but you at least are taking that risk.
Every investor has an amount that they deem appropriate for wholesalers to charge in this type of transaction. A lot of the investors I’ve talked to say they hate working with wholesalers because they rip them off and charge them too much.
If you don’t assign, you never have to worry about this!
There is no reason you have to disclose the amount you purchased the property for otherwise.
Our Business Model and Our Strategy
We utilize the strategy of “closing and reselling later” because, for one, this is the real definition of wholesaling.
Any industry outside of real estate considers the selling of products to businesses for retail purposes to be the very definition of wholesaling. Look it up on dictionary.com if you don’t believe me!
We buy our properties at steep discounts, then resell them to other businesses (investors) at a slightly higher fee than what we purchased them for, and then the buyers use our properties to make money.
Sounds like the conventional definition for wholesaling to me!
Another reason we actually close and then resell later is because I just think it’s a cleaner process. No one will question the legalities of me selling my own house. No one will question how much money I make on the transaction because they won’t know. I don’t have to worry about asking to show the property, marketing, nothing! It just becomes a very simple and clean transaction this way.
Also, I think doing business this way is simply more honest. If I tell someone and enter into a legal contract with them saying I’m going to buy their house, I’m going to actually purchase their house.
It’s just the right thing to do, man!
Beyond that, if you base your entire business solely on the assigning of contracts, you heavily limit the type of properties you can make money on. Have you ever tried to assign the contract on an REO or HUD property? You can’t do it!
But I buy those all the time.
Now, at this point there may be some questions that arise like, “Don’t you make less money doing it this way because of closing costs?” The answer is yes, in the short term.
But wouldn’t you rather have a business that people can trust? Don’t you think that long term if people know you follow through with what you say, that you’ll get more repeat buyers and sellers?
Don’t you think if things actually happen the way they should ethically and morally that the sustainability of your business will be as solid as a rock?
I do, and it’s worked for me for close to a decade now.
But What if I Don’t Have the Money to Close With This Strategy?
Well, not to burst your bubble, but maybe you shouldn’t buy the property then.
I don’t want to harp on this too much, but there is a really weird mindset out there today that is so hyper “wannabe-savvy” that we forget that success takes a lot of hard work to accomplish.
I did my first deal on $5,000 and then worked my butt off being a full-time wholesaler and full-time employee for an entire year.
I saved up working capital (like you should with any business), and then once I had enough coming in to take care of my needs, I jumped in full-time.
Now, that’s not sexy, but it works.
Another thing you can do is partner with someone. If you have $5,000 and a friend or relative has another $5,000, then boom. You now have $10,000 to start with.
Yes, you’ll have to split profits, but a piece of the pie is better than none at all.
Once you have a little bit of a track record, you can also reach out to private money lenders. That has come in handy for me over the years, when my capital has been tied up in other properties.
I’d offer a private lender something to the effect of 2% of their money in 30 days, or they can begin charging 15-20% interest until they are paid in full. Do you think a private lender would like to make 2% on their money in 30 days or less? I know some who love it!
It normally works out well for the both of us, and again, that’s because I follow through with what I say I’m going to do.
So with that, I think we’ll wrap up.
My biggest point in all this is that we need to step it up as an industry. Wholesalers, for too long we have been dubbed the scum of the earth, and it’s because we do things like assigning contracts. Let’s get out of the grey and keep things black and white. Deal?
Investors: What do YOU think? Should wholesalers stop assigning contracts? Why or why not?
Leave your comments below!