What Is A Wholesale Real Estate Contract?
Laura Gariepy8-minute read
March 14, 2023
If you want to break into real estate investing but you’re short on cash, becoming a wholesaler could be a lucrative option for you. In fact, with some know-how and luck, you can turn quick profits without spending any money. But, before you get too excited, you’ll need to understand how a wholesale real estate contract works – including the potential risks.
Real Estate Wholesale: The Basics
A wholesale real estate contract is a short-term investment strategy where the wholesaler hopes to make their money within 30 days. Though wholesale real estate laws vary by state, the process always involves the wholesaler acting as the go-between between a home’s seller and an end buyer.
The wholesaler creates a contract with the seller for the exclusive right to buy the property for a set amount. Then they attempt to reassign the contract to another potential buyer for a higher price. The difference between the two prices is the wholesaler’s profit.
At the time of the contract, the wholesaler and seller enter into the doctrine of equitable conversion. That means the wholesaler becomes the property owner with the right to transfer the contract, but the seller retains the home’s title. When the wholesaler reassigns the contract, the end buyer completes the real estate transaction directly with the seller.
To be an effective wholesaler, the real estate investor simultaneously needs to do two things: build a wholesale buyers list and find properties to get under contract. The wholesaler’s buyers list is a directory of potential end buyers – usually other real estate investors, such as flippers or those looking for rental property.
Ideally, the wholesaler can cultivate strong relationships with these investors to get their repeat business. Without regular buyers, the wholesaler’s job of quickly reassigning contracts will be much more difficult. Wholesale real estate investors also need to be on the lookout for suitable wholesale homes continuously.
When it’s time to choose a property, wholesalers generally target distressed properties, known as fixer-uppers. These houses often have very motivated sellers, which means the wholesaler can get the home under contract below market value and make a tidy profit from the contract reassignment.
For example, a wholesaler finds a motivated homeowner and gets a distressed property under contract for $200,000. Then, they market the property to their buyers list. A flipper sees potential and agrees to buy the home for $210,000. If the transaction goes through successfully, the wholesaler will earn $10,000 from the real estate deal.
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Wholesale Real Estate Vs. Flipping
While wholesaling real estate is often referred to as flipping real estate contracts, actual house flipping is an entirely different investment strategy. Unlike a flipper, a wholesaler doesn’t repair or upgrade the property that they invest in. Renovations take too long, and the wholesaler wants to unload the property fast (ideally within 30 days).
Being a wholesaler is also less risky than being a flipper. The wholesaler doesn’t purchase the property as a flipper does. They only use a contract to obtain the right to buy the property with the intention of selling those rights for more than they agreed to pay. The wholesaler can also back out of the contract with the seller, which further reduces their risk.
However, since the flippers take on the additional risk, they are entitled to an additional reward. A fully renovated property will sell for more than the wholesaler can get transferring the home’s contract in as is condition. That means flipping can be more profitable than real estate wholesaling. If you’re interested in buying a house to flip, a great place to start is a mortgage approval. That will let you know more about what you can afford and what your financing options look like.
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The Ins And Outs Of A Wholesale Contract
The wholesale contract has two main parts: the wholesale real estate assignment contract and the wholesale real estate purchase agreement. We’ll explore both in detail below.
Wholesale Real Estate Assignment Contract
A wholesale real estate assignment contract is the legal document that facilitates the transfer of the right to purchase a property from the wholesaler to an end buyer. Once the seller and wholesaler have entered into equitable conversion, an Assignment of Real Estate Purchase and Sale Agreement is drafted.
The agreement stipulates that the new buyer will assume property ownership, which includes purchasing the home from the seller. The wholesaler will then be absolved from all responsibility.
The assignment contains a copy of the original purchase and sale agreement between the seller and wholesaler. This document gives the buyer a full view of any terms, contingencies, conditions, stipulations and prices involved in the deal.
The assignment also includes the wholesaler’s payment terms. When the assignment is signed, the wholesaler will usually receive a portion of their profit as a deposit. After closing, they’ll be paid the remaining balance.
Wholesale Real Estate Purchase Agreement
The wholesale real estate purchase agreement has a lot of moving parts. Here’s a breakdown of the components you can expect to see:
- Parties involved: This refers to the new buyer and seller.
- Description of real estate: The address and legal description of the property must be included.
- Deed type: What type of deed comes with the sale of the property should be specified.
- Condition of premises: This section lists out the physical state of the property, including existing damage and needed repairs.
- Purchase price and financing: The agreed-upon price and financing terms are recorded along with where deposits will be held.
- Closing date: This will be the day when the real estate transaction is finalized.
Contingencies, Clauses and More
- Financing contingency: This addition allows the buyer to back out of the transaction if they’re unable to obtain the required financing. However, this won’t be an issue if you have a cash buyer.
- Inspection contingency: An inspection contingency allows the buyer to back out of the wholesale deal if they’re dissatisfied with the results of a home inspection.
- Marketable title option: If the buyer can’t obtain title insurance, the deal can be called off.
- Buyer and seller default clauses: This section defines what happens if either party defaults on the sales contract.
- Risk of loss and damage clause: This clause protects the buyer in the event of property damage while under contract.
- Adjustments clause: This part can include accounts for property taxes, utilities and other charges, and it varies depending on the state.
- Statement regarding lead-based paint: This disclosure notes whether or not the property has lead-based paint.
- Addenda: The document includes standard legal language at the end of the contract as well as any additions made after the initial signing.
Is A Wholesale Real Estate Contract Right For You?
A wholesale contract can benefit both the seller and buyer in different ways. Let’s take a close look at the pros and cons for both parties, so you can decide if entering one (or more) of these contracts is suitable for you.
Pros And Cons: For The Seller
As a seller, there are two main pros of working with a wholesaler. If you’ve got a distressed property, it will be easier to sell it wholesale as-is. That means you’ll avoid paying for costly repairs to make the sale.
In addition, you won’t be looking for a buyer on your own. A wholesaler will typically market your property to a vast network of real estate agents and investors, helping you make the sale fast.
However, it’s not all good news. Working with a wholesaler involves two main potential drawbacks. A wholesaler influences the terms of the sale, including raising the price of your home so that they can make a profit. If it sells, you won’t see a penny of that increased price.
But, if it doesn’t sell in the contractually specified time frame, the wholesaler can back out of the deal. That means you’ll be back at square one trying to unload your property.
Pros And Cons: For The Buyer
As a buyer, there are two big perks of wholesale real estate investing. A wholesaler does much of the legwork for you, finding potential investment properties for you to buy. That’s a big timesaver for you.
Plus, when you buy a wholesale property, you’re working with a motivated seller. That means you may be able to score a great house at an even better price.
Unfortunately, the deal won’t be as sweet as it could be if you had negotiated it on your own. That’s because the wholesale price is inflated to pay the wholesaler. You’ll need to be sure the property has enough potential upside to offset the higher cost.
Also, wholesalers don’t have to be professionals with real estate licenses. Because of this, working with one could be risky. You’ll need to do your due diligence, including asking for references, before making any commitments to buying a home.
Whatever path to purchase you’re considering, it’s a great idea to get approved to purchase a home before you begin seriously weighing options. An approval will give you a clearer sense of what you can afford and what financing options will work best for you.
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FAQs About Real Estate Wholesaling
Below are some of the most common questions investors have about the wholesaling process.
Is wholesaling real estate legal?
Yes, but the legal process can vary state to state. To make sure you’re following the rules, you should research your state and local laws. These regulations are put in place to protect you, the property owner and the potential buyer. Make sure you understand the legal requirements before you begin wholesaling properties.
Can a seller back out of a contract?
It depends on the contract and the situation, but in most cases, sellers can find legal justification to back out of a deal if they have included clauses in their contract and are motivated to void the agreement. This can happen for many reasons such as:
- The owner got a higher offer from another buyer outside of the wholesale contract.
- The seller was unable to find a suitable replacement home to move into.
- They have seller's remorse and no longer want to sell their property.
Where do I get real estate wholesale contracts?
If you are interested in creating a wholesale contract, you will first have to find a motivated homeowner who wants to sell their property. Then you will create a contract with the help of a real estate attorney for the seller to sign. Some wholesalers even create a contract template, which can speed up the process, but you should still get legal advice before completing the document.
Can I wholesale commercial real estate?
Yes, you can wholesale commercial properties, but the process is a little different. Wholesaling as an investment strategy is less common in the commercial real estate world, so your competition will be low. However, these properties are larger and more expensive than residential homes, so this practice is slightly riskier. There are also more laws and regulations to follow when drafting purchase contracts for commercial buildings.
The Bottom Line: Is Wholesaling A Smart Investment Strategy?
Wholesale real estate contracts are different from standard real estate contracts. Wholesalers get to make money from real estate without ever actually buying anything, the profit comes from the service provided. They simply flip the contract and make a profit. Both buyers and sellers can benefit from a quick transaction.
However, while wholesale real estate contacts may be a good investment, they can be complicated – especially if you’re new to them. That’s why you should consult an attorney, a licensed real estate professional or both before signing on the dotted line. They can provide custom advice based on where you live and your specific situation.
Are you thinking about starting to invest in real estate or buy a home? Do it with confidence. Talk to a loan expert at Rocket Mortgage® today.
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