4 ways to wholesale real estate
Do you want to invest in real estate without financial risk and without money or credit? Wholesaling houses is a popular option. Personally, I think wholesaling can be a challenging way to start, but the fact that you can start investing in real estate without any barriers to entry makes wholesaling an attractive option. If you can be good at this side of the business, you will be successful in whatever you want to do. The reason I say that is finding bargains is what makes a wholesaler successful. If you can become good at finding deals, you have unlimited potential.
Once you find an offer, you need to understand how to sell it for a profit. Here are four ways you can structure your wholesale properties.
Contract assignment: This is the easiest, but it carries some risks if not done correctly. It is also somewhat restrictive, as bank properties will prevent it. This works well when negotiating your deals directly with the seller. The way this works is that you will get a house under contract and then transfer your rights in the contract to another buyer for a fee. That new buyer will assume the rights and responsibilities of the contract and will close in your place. It is best to pay your fee in advance, but it is very common to receive it when the buyer buys the home. Here are some things to keep in mind when assigning contracts.
Be sure to always inform your seller that you are or may transfer the deal to another buyer for a fee. I suggest you put this in the contract. Sellers should agree to this if you are transparent that you are an investor buying houses for profit before you start trading.
You would get money from your money that is at least enough to cover any security deposit you pay with your seller. That way, if your buyer defaults on the agreement, you will at least cover your costs. Always try to have the full fee paid when you assign the contract.
I like this way best because it’s easy to do on your part, it’s easy for the buyer and the buyer’s lender, and it’s the cheapest way to do it.
Double closure: This just means that you actually buy the house and then resell it. There are several ways to do this, but the most common is to buy and sell on the same day or within one day. You will generally need to obtain financing to do the closing with the seller, so this is my least preferred method of wholesaling. Also, because you have two closings, you will have two sets of closing costs, so this is also the most expensive way. That said, some wholesalers prefer this method because they do not have to disclose their intention to resell to the seller and both can keep their dealings with the seller and their dealings with their private buyer. Some believe this is a good way to protect your earnings. All information will become a public record at some point, but that’s long after closing.
This is the method that you will use by default if you don’t fulfill your contract up front correctly, which is why we see double closings frequently.
Flip the entity: This has become the most common form of wholesaling in my market. Most, if not all, successful wholesalers will use this strategy. Especially when selling wholesale foreclosures where contract assignments are prohibited.
The way this works is that the wholesaler will establish a separate entity, such as an LLC or Trust, and place that entity as the buyer of the home to be wholesaled. They will then sell the entity itself for a fee. The benefit of using this strategy is that the actual contract on the house does not change. Since the home buyer is the entity, there are no problems with any allocation regulations or restrictions. The downside is that it could be more work due to the extra step to set up the entity, and there could be additional fees to register the entity with the state. The risk for the buyer is that every time he buys a business, he buys it in its entirety. Therefore, if the entity was used in another transaction and you owe someone money, the new buyer could be compromised. Knowing this, the best way to do this transaction is with a new entity used for this purpose.
Close relationship: I don’t know if there is a real name for this method. In fact, it is rarely seen. What I mean by close relationship is that you have such a strong relationship with a buyer that you write offers on the buyer’s behalf. For this to work, you need to be a licensed agent and preview the homes for your buyer. You should understand their criteria and offer only the houses that they will want to buy. I have a client that works this way. Have an agent write your offers and the agent / wholesaler is paid a commission on each successful closing. They do 2 to 3 deals a month with this strategy. My client just signs contracts without looking at them right now and trusts that the wholesaler is crafting solid offers. There is always an inspection clause that protects the buyer and the agent, but more than 9 out of 10 houses that enter into contract close. This is because the agent / wholesaler knows the business and knows what this buyer will buy.
I would steer clear of this method, especially if you are just starting out. Many things can go wrong. I wanted to mention it because it is one of the 4 ways I see people wholesale. If you are just starting out, I would focus on contract assignments and then changing the entity.