What Is A Wholesale Real Estate Contract?
Laura Gariepy6-minute read
November 20, 2020
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 need to understand how a wholesale real estate contract works – including the potential risks.
We’ll give you the full scoop here.
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 intermediary between a home’s seller and an end buyer.
The wholesaler contracts with the seller for the exclusive right to buy the property for a set amount. Then they attempt to reassign the contract to an end buyer for a higher price. The difference between the two prices is the wholesaler’s profit.
At the time of 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 waiting, regular buyers, the wholesaler’s job of quickly reassigning contracts will be much more difficult.
On the flip side, if the wholesaler doesn’t have any properties under contract, the depth and quality of their buyers’ list won’t matter. That means they need to continuously be on the lookout for suitable wholesale homes.
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 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 $250,000. If the transaction goes through successfully, the wholesaler will earn $50,000 from the deal.
Wholesale Real Estate Vs. Flipping
While wholesale real estate investing is often referred to as flipping real estate contracts, actual house flipping is a completely 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 actually purchase the property like a flipper does. They only contract for the right to purchase 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. Fully renovated property will sell for more than the wholesaler can get transferring the contract with the home in as-is condition. That means flipping ultimately can be more profitable than wholesaling.
The Ins And Outs Of A Wholesale Real Estate 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 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: The new buyer and seller
- Description of real estate: The address and legal description of the property
- Deed type: What type of deed comes with the sale of the property
- Condition of premises: The physical state of the property, to include existing damage and need for repairs
- Purchase price and financing: The agreed-upon price and financing terms, to include where deposits are held
- Closing date: When the real estate transaction will be finalized
Contingencies, Clauses, and More
- Financing contingency: Allows the buyer to back out of the transaction if they’re unable to obtain the required financing
- Inspection contingency: Allows the buyer to back out of the deal if they’re dissatisfied with the results of a home inspection
- Marketable title option: Allows the deal to be called off if the buyer can’t obtain title insurance
- Buyer and seller default clauses: Defines what happens if either party defaults on the contract
- Risk of loss and damage clause: Provides protection to the buyer in the event of property damage while under contract
- Adjustments clause: Accounts for property taxes, utilities, and other charges; varies by state
- Statement regarding lead-based paint: Discloses whether or not the property has lead-based paint
- Addenda: 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 into one (or more) of these contracts is right 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 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 has influence over 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 timeframe, 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 properties for you to buy. That’s a big time-saver 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 property at an even better price.
However, 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 price.
Also, wholesalers don’t have to be licensed real estate professionals. Because of this, working with one could be risky. You’ll need to do your due diligence, to include asking for references, before making any commitments.
The Bottom Line On Wholesale Real Estate Contracts
Clearly, wholesale real estate contracts are totally different than standard real estate contracts. Wholesalers get to invest in real estate without ever actually buying anything. 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 aren’t without a downside. 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.
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