The real estate investing business attracts entrepreneurs far and wide because of its proven paths to generate wealth. Wholesaling real estate is an appealing strategy that many decide to take on because of its speed and simplicity in earning quick profits.
As a real estate wholesaler, the primary money-making tools in your business will be wholesale real estate contracts.
These contracts, as well as wholesaling in general, may seem intimidating at first but don’t you worry! We will give you all the insight you need to be successful in this business.
Whether you're a real estate investor buying deals from a wholesaler or a wholesaler selling contracts, it'll be beneficial to get familiar with what these wholesale real estate contracts are and what they do.
We hope you enjoy Wholesale Real Estate Contract: The Ultimate Guide! Use this menu to jump to the section of your choice:
A wholesale real estate contract is a legal document that creates a binding agreement between a wholesaler and a property owner. The terms of this agreement provide the wholesaler an avenue to earn a quick profit in a short-term window of time.
Depending on the particular wholesaling strategy, there will be different contracts used in the agreements between the parties involved. Some of these strategies include:
The common contracts used in wholesaling real estate include:
As soon as the appropriate contract is signed, the buyer is granted an equitable interest in the property. This interest provides certain rights to the buyer, such as the ability to purchase it.
These contracts are not unique to real estate wholesalers. Whether you're a wholesaler, motivated seller, or a real estate investor, you will certainly encounter these contracts as you go through the real estate investing process.
Let’s define what these contracts are and how they are used in real estate wholesaling.
Also known as simply the "Purchase Agreement" or "Real Estate Sales Contract," this contract solidifies your agreement and secures your right to purchase or sell a property to another party.
There are hundreds of different purchase agreements available for real estate investors to buy and sell real estate with, so consult your local real estate attorney to make sure you have a reliable and compliant contract for your state.
If you plan on assigning the contract, you may want to include an assignment clause in the purchase agreement to expressly allow an assignment to take place within the transaction.
When you're double closing or wholetailing an investment property, two separate purchase agreements will be used to complete the deal.
A lease option contract is a combination of three common real estate agreements:
In short, the rental or lease agreement allows a party to rent a property from the owner under a set of predetermined terms. These terms include the rental rate, duration of the tenancy, and security deposit amounts.
An Option Contract gives a buyer the right, but not the obligation, to put the property in escrow and close on it according to the terms of a referenced Purchase and Sale Agreement.
The option period is the window of time that the buyer has the right of exercising their option of engaging in the sales transaction. Once the option period expires, they may not be able to exercise this option.
An option fee is non-refundable money paid to the property owner at the time of contract signing to give the buyer the right to exercise the option within a designated period of time.
An assignment agreement is used when the wholesaler does not close on the property itself, but rather transfers his interest in the purchase contract to another buyer before escrow closes.
An assignment fee is paid to the wholesaler for procuring the opportunity for the end buyer. An assignment contract is not always necessary when double closing or wholetailing a property.
To put things into perspective, let’s define what wholesaling is so we can establish how the contracts come into play.
A real estate wholesaler is essentially a middleman who puts properties under contract for under market value, then finds end buyers for those properties.
Homes that are wholesaled are typically distressed properties that are purchased from motivated sellers and can be fixed up and flipped for a profit. Move-in-ready homes that have been fully rehabbed are also widely wholesaled to buy-and-hold investors.
Savvy wholesalers utilize a combination of wholesale real estate contracts to make a profit from bringing the property to an end buyer.
For instance, in an assignment of contract deal, the wholesaler locks up a property using a purchase and sale contract, then earns an assignment fee by assigning their interest in that contract to an end buyer before the sale closes.
They transfer their rights to purchase the property to another party by utilizing an assignment contract. Then, the end buyer closes on the property, fixes it up, and sells it for an even larger profit.
Many wholesalers prefer the assignment of contract method because it doesn't require any of their own capital invested in the deal, they don't incur any closing costs, and they are paid in the quickest timeframe.
The wholesaler simply secures and coordinates these agreements simultaneously between the seller and potential buyers. The wholesaler's earnings come from securing a buyer that pays a higher price than their original contract, thus pocketing that difference.
In addition to real estate wholesaling via assignments, there are variations of wholesaling that can also occur. Double closings and wholetail real estate deals are valid strategies, but require the wholesaler to actually fund and close on the property. Co-wholesaling and reverse wholesaling are also valid strategies worth exploring further.
Often referred to as "Joint Venturing" or "JV'ing," the process of co-wholesaling is no different than traditional wholesaling. However, two wholesalers work on the deal together instead of one.
A common co-wholesaling agreement calls for one investor to have a property under a contract while the other brings in a cash buyer.
As they work through the process together, the partners share the profit made on the co-wholesaled deals.
Co-wholesaling brings in a big benefit as you’re not handling all the responsibilities of this business on your own. You will be able to share and access each other’s networks and connections.
For instance, one wholesaler may have a robust cash buyers list, while the other wholesaler focuses solely on acquiring exceptional real estate deals. While co-wholesalers split their fees, it can make wholesaling houses less intimidating and more fun.
When entering a co-wholesaling relationship, the only additional wholesale contract to use is a co-wholesaling agreement, which memorializes the roles, rewards, and responsibilities of your working relationship.
Reverse wholesaling entails everything the usual wholesaling does except for the fact that some of the steps are completed, well, in reverse!
When reverse wholesaling, the wholesaler finds cash buyers and financial partners first, compared to traditional wholesaling where the seller and properties are found first.
Finding the buyer first allows the wholesaler to find an investment opportunity that will appeal to that specific buyer. Understanding their desired price range, investment criteria, and preferences will help establish what you’re looking for in a deal instead of going in blindly.
Nonetheless, this process will ideally go quicker since both the wholesaler and end buyer are in closer communication from the beginning.
Despite what might seem like an intimidating process, wholesaling contracts provides benefits that will help any new and experienced investor earn profits throughout their real estate career.
Why should you wholesale you may ask? Well, here are a few reasons why!
Even if you’re just starting your journey in the real estate business, wholesaling is something that will be extremely valuable for you to master! Learning how to analyze deals like an investor and make money flipping real estate contracts will accelerate your journey to financial freedom.
With the right education, resources, efforts, and practices, you will be sure to get into the rhythm at no time at all!
Read Also: How To Wholesale Step By Step - The Simple Process
One of the great benefits of being a wholesaler is the profit you can earn while putting in little money of your own.
The main way a wholesaler gets paid is from a wholesale fee. The wholesale fee, or assignment fee, is earned when the wholesaler sells an active purchase contract (or lease option contract) and transfers the contractual rights to the buyer/investor.
Another profit center for wholesalers occurs when the wholesaler buys the property, then quickly resells the property to another party at a higher price. This requires the wholesaler to actually close on the piece of real estate.
The net profit from "buying low and selling high" is the wholesaler's profit. Since two real estate transactions occur in this wholesaling method, there may be added closing costs.
Typically, the amount and logistics of how a wholesaler will get paid are described in the wholesale assignment contract. It may also specify whether or not the wholesaler will be getting paid in escrow or outside of escrow.
What Is Escrow?
Escrow is a popular term you will hear in the real estate business.
According to Rocket Mortgage, “Escrow is a legal arrangement in which a third party temporarily holds large sums money or property until a particular condition has been met (e.g., the fulfillment of a purchase agreement)”
There are different types of escrow accounts that serve different purposes. There are escrow accounts specifically for home buying and the other for taxes and insurance.
In regards to home buying, the escrow account is usually set up to hold the earnest money deposit you put in that was included in your purchase agreement. This monetary value will then remain in the account until the transaction is closed.
So, how does escrow come into play in my wholesale contract? Overall, escrow will hold your earnest money and will be applied appropriately throughout your home buying process.
Nonetheless, if you are getting your wholesale assignment fee paid through escrow, you may receive a check from the title company themselves. The money that was put into that account may have included the price that would be used to pay the wholesale fee. On the flip side, being paid outside of escrow entails that the end buyer will pay the wholesaler directly.
Wholesaling can bring in an abundance of profit from the various ways it can be approached. One of the profitable ways being assigning a property under a wholesale real estate contract, which is very much legal and is a common real estate practice.
Despite the legitimacy of the contracts and process, it is crucial that you are aware of the rules and regulations when it comes to the state the property is in. Similarly, it is widely important for both parties to communicate, agree and clarify all terms to avoid any conflicts or misconceptions regarding the contract.
Furthermore, according to Restatement Second of Contracts § 317, assignments are allowed in contracts unless it's precluded in the contract.
If there is no assignment clause or a clear prohibition of assignment, it is automatically allowed. However, watch out for clauses in purchase contracts that prohibit assignment. This can be true with forms that Realtors use during the wholesaling process.
Well, what do you do if you can’t assign the property to the contract? There are a few options to consider:
Standard Contract Assignment Addendum
If the wholesale real estate contract prohibits assignment, a standard contract assignment addendum is one option you may want to consider.
A standard contract assignment addendum amends the initial contract that prohibited assignment. Most real estate brokers or attorneys will have access to a similar form.
Here is a photo displaying language you may see in a standard contract assignment addendum:
This explains certain conditions between the seller, the assignor, and the assignee relating to the property at hand. When dealing with purchase contracts that are not assignable, an assignment contract is a strong option to consider.
Another considerable option is double closing on the transaction, also referred to as a "Back-to-back closing", "simultaneous closing", or an “A to B, B to C transaction". This can be ideal for contracts that are unassignable to third parties, such as with some REO properties or bank-owned homes.
Real estate contracts that are unable to be assigned should have larger wholesale profits in order to afford the added costs of double closing. Transactional funding from private lenders can cost around 1-5% of the total loan amount and multiple sets of closing costs can add up.
What does this mean exactly? Well, instead of assigning the rights to the new buyer, you as the wholesaler will close on the purchase and take title to the property. While it's always negotiable, this can result in two sets of closing costs. One tip to save money when double closing is to request one title insurance policy to cover both transactions.
Transactional funding is available for wholesalers who cannot or choose not to assign the contracts. This can provide the wholesaler with acquisition money to close on the deal with the expectation of gaining a profit after it is quickly resold.
As we have discussed these contracts in terms of a seller, wholesaler, and buyer, who falls into the category of being a buyer? Who buys the wholesale real estate contracts?
Additionally, wholesalers themselves participate and purchase these contracts. Depending on the property and profit they get off of it, they may choose to buy contracts to sell to other investors in their network or keep it as an income-producing rental property.
As we’ve discussed, wholesaling brings in many benefits, revenue from the transactions being one of them. Thus, these contracts aim to provide all parties with winning situations.
Now that we have gone through some context regarding the contract, let's discuss who is needed to complete a wholesale real estate contract.
Well, the contract itself is not hard to establish. You can download one from a legal forms website, obtain one from a real estate agent, title company, real estate attorney, or even write up your own.
To fully complete a wholesale real estate contract, you will most importantly need a seller, wholesaler, buyer, and a title company.
A title company is needed to protect all parties of the contract. The title company's job is to reassure that the title of the real estate is legitimate and also issues title insurance.
As we continue to go through the Wholesale Real Estate Contracts, you will see how these parties are put into play in the entire process.
If you are new to real estate sales contracts, you'll need some guidance on what to look for to make sure you know what you're getting into. This section will cover the purchase agreement and provide you with key components to include if you ever create your own contract.
Here are some elements of a wholesale real estate contract:
The contract will become binding once signed by both parties. Typically, any changes to the contract must be made in writing and signed by the parties involved.
Some wholesale deals may also require more than just this contract, such as an assignment addendum, depending on if the purchase agreement prohibits assignments.
Reassurance and clarification are important for all parties to be satisfied and successful in this process. Always seek legal counsel from a local real estate attorney when altering and writing up contracts.
These wholesale real estate contracts all follow and require the same format, so you can either use one you can find online or make your own! Just remember to include all main parts of the contract so the legality of it doesn’t become an issue. The template above can be used as a resource, as well as the downloadable PDF below.
Some other factors that are essential to ensuring you have a legally binding wholesale real estate contract include:
If these elements aren't present in the formation of your wholesale contract, then you may have an invalid contract on your hands. Don't spoil a great opportunity by missing these important concepts.
Writing your own contract, or participating in the entire wholesaling process, doesn’t require you to be a licensed real estate agent. This is one of the great benefits of wholesaling, anyone can do it! If it is in your best interest to learn, just remember that ultimately everything is at your reach.
If it’s your first time dealing with wholesaling or you’re too busy to make your own contract, don’t worry!
Here’s a Wholesale Real Estate Contract PDF Download for you to use! You'll receive the following FREE contracts provided by Real Estate Skills:
By learning the concepts provided throughout this article and with the guidance of a real estate attorney, you'll be well on your way to crafting your next profitable real estate wholesale deal.
A contract is a legally binding document so don’t hold your breath if you think it’s easy to get out of it. As you sign a contract, you agree with the terms and conditions that are listed within that document. You also take on any consequences that may occur with it if you breach the contract.
Wholesale real estate contracts contain contingency clauses that allow a party to terminate the agreement without repercussions when certain terms aren't met. This part of the contract clarifies any conditions that need to be met in order for the contract to be legally binding. Once the conditions are met, the contract then becomes binding.
A specific contingency to be aware of is the inspection contingency, also called the due diligence contingency. This states a specific time period for the buyer to have the home inspected. With this contingency, the buyer is able to cancel the contract or negotiate certain actions for the seller to take if appropriate for the home.
Here's a short video explaining the home inspection contingency in greater depth:
It is important to note that not all contracts will have an inspection contingency clause. New investors can lose money, even in a low-risk wholesale deal, without the right training and guidance. Having this contingency clause is something that may be overlooked so it is important to be aware of this.
Here's an example of a basic due diligence contingency in a contract:
“Closing will take place on or before: ____ at _____ or TBD, Subject to a 45-day period in which the buyer/seller shall be permitted to do necessary due diligence and to clear any title problems”
So, how do I get out of this contract? There are two options, one good and the other not so much.
The first option is the situation you would typically want. This is when you ask to cancel the contract within the contingency time period. This will typically permit the cancellation of the contract and your earnest money deposit will be refunded back to you.
However, as you have committed earnest money, the situation may not look so hopeful for you if you are outside the contingency period. The earnest money becomes non-refundable when the contingencies in the contract are removed or expire. This will result in the loss of your earnest money deposit if you cancel the contract.
Not only have we discussed the wholesale real estate contracts but also the wholesaling process as a whole. We have established the context in which wholesale purchase contracts are utilized and what to be aware of throughout the entire deal.
Wholesaling can create amazing wealth opportunities as well as educational benefits for those looking into the real estate business. Whether you want to wholesale property, flip houses, or invest in real estate passively, it is all up to you.
The determination and grit you put into the process will be beneficial to you in more than just monetary value and the results will manifest in obvious ways.
As contracts are important in terms of legality, they must be taken seriously in order to be applicable and successful. Read every contract with the utmost diligence, as this awareness creates strength and opportunity when it comes to negotiating great wholesale deals. You won’t regret it!
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