Wholesaling real estate remains a prominent avenue for new real estate investors as we head into 2024 for its ease, speed, and straightforwardness in reaping quick profits.
At the heart of this lucrative approach lies the indispensable tool: the wholesale real estate contract.
Whether you're an investor procuring deals from a wholesaler, or dealing in wholesaling contracts yourself, it's essential to understand what these contracts entail.
In this article, we will cover what a wholesale contract is in real estate, the types of contracts you'll need, answers to frequently asked questions, and (of course) our FREE downloadable templates so all the heavy lifting is done for you!
So what are you waiting for? Download our FREE wholesale contract PDF template now, and let's start your journey toward mastering the art of wholesaling real estate:
*Before we begin our guide, we invite you to view our video on How To Wholesale Real Estate Step by Step (IN 21 DAYS OR LESS)! Host and CEO of Real Estate Skills, Alex Martinez, provides a comprehensive, step-by-step guide for beginners to start wholesaling real estate!
If it’s your first time dealing with wholesaling or you’re too busy to make your own contract, don’t worry! 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.
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:
A wholesale real estate contract is a legal agreement between a property wholesaler and a seller. As a wholesaler, you'll find a deal, secure rights like a real estate agent would, and assign this contract to an investor. You can also reverse this process, finding a buyer before you find a property. This method can save you time and make your deal more efficient.
This short-term strategy aims to turn profits within a month. It involves getting exclusive buying rights from a seller and then transferring that contract to another buyer at a higher price. Your profit is the difference between these two prices.
During the contract, you hold the ownership rights and can transfer the contract, but the seller still holds the title. When you transfer the contract, the final transaction happens directly between the end buyer and the seller.
Your job as a wholesaler is two-fold: build a list of potential buyers and constantly look for properties to contract. This list, often other real estate investors, is crucial for quick contract transfers. Targeting distressed properties is a common tactic as they often have motivated sellers, allowing you to contract the property at a lower market value and profit from the contract transfer.
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 most 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.
Now, let’s define what each of these contracts are and how they are used in real estate wholesaling.
*To learn more about the ins and outs of wholesale contracts, attend our FREE Training on real estate wholesaling and house flipping!
Read Also: How To Wholesale Real Estate With No Money
Also known as simply the "Purchase Agreement" or "Real Estate Sales Contract," a Real Estate Purchase and Sale Agreement 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 a 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.
Investors use a wholesale real estate assignment contract to facilitate a property sale between an original owner and an end buyer. In this agreement, the investor gets the right to buy the property but doesn't actually purchase it. Instead, they sell their buying rights to another buyer. This distinction is critical; the wholesaler isn't selling the property, but their rights to purchase it.
However, the effectiveness of this strategy hinges on the contract itself. The language must clearly outline the expectations of both parties involved. It's crucial to consult a real estate attorney to ensure the contract doesn't have prohibitions against future assignments, which could cause issues later.
The Doctrine of Equitable Conversion plays a crucial role in this process. Once a real estate purchase agreement is signed, the buyer becomes the equitable owner, and the seller holds the legal title to the property. Therefore, when a wholesaler sells the contract, they're selling their equitable interest or rights within the contract terms to another buyer.
It is important to note that certain properties, like HUD homes, REOs, and listed properties, are not open to assignment contracts. REO properties, for instance, have a 90-day period before they can be resold.
In essence, a wholesale real estate assignment contract allows you, as the investor, to match sellers with buyers. It's essential, though, to hire an attorney familiar with wholesaling transactions to ensure the contract's language suits your needs.
After signing the contract, you gain an equitable interest in the property. You control the property via the contract without holding the title. The next step is assigning your contractual rights to another investor using an Assignment of Real Estate Purchase and Sale Agreement. The new buyer will take on your responsibilities, including buying the property under the original contract's terms.
It's critical to ensure the new buyer understands the original contract's terms and conditions. A copy of the purchase and sale agreement should be attached to the assignment contract for transparency. The terms of your payment as a wholesaler will be included in this assignment agreement, typically a deposit at signing and the remainder after closing.
Wholesale real estate assignment contracts come with a multitude of benefits that appeal to investors at every level. They offer a unique opportunity to turn a profit quickly, even for those with limited resources or experience. This method of investing offers significant pros, each contributing to the appeal of wholesaling real estate. Here are some of the key advantages:
If you're a beginner in the real estate industry or seeking to expand your portfolio, mastering the art of wholesaling can significantly propel your journey toward financial freedom. By honing your ability to analyze deals, flip real estate contracts, and adapt to market trends, you'll establish a solid foundation for your real estate career. But remember, success in wholesaling doesn't happen overnight - it's all about the right education, resources, and strategic efforts.
To effectively navigate the path of wholesaling, it's important to be aware of potential challenges along the way. This knowledge allows you to develop a more strategic approach to overcome these hurdles, and ultimately achieve success. Here's a look at some of the challenges associated with wholesale real estate assignment contracts:
While these challenges might seem intimidating at first, they are part and parcel of the wholesaling journey. Keep in mind that every hurdle overcome is a step forward in your wholesaling education and experience.
Ready to take the next step? Join our comprehensive real estate wholesaling course to deepen your understanding and boost your success rate.
Read Also: How To Find Distressed Properties To Buy
Among wholesalers, two common strategies are Assignment Contracts and Double Closings. Knowing the ins and outs of both can help investors choose the best method for their situation.
Remember, an Assignment Contract happens when a wholesaler secures a deal with a seller and then assigns their contract rights to a buyer. This way, the wholesaler makes money without officially owning the property.
On the other hand, a Double Closing involves the wholesaler both buying the property from the seller and then selling it to a buyer. In this situation, the wholesaler briefly owns the property before selling it off. This process involves two separate transactions, each with its own costs and fees. The wholesaler appears on the title and must cover all costs associated with buying and selling properties.
No one strategy is better than the other—it all depends on the specifics of the deal and the investor's circumstances. Things to consider when choosing between assignment contracts and double closings include potential profit, the buyer's financing plans, and how quickly the buyer can access funds. By weighing these factors, investors can make the best choice for their situation.
Read Also: Double Closing: The Ultimate Guide
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.
According to Rocket Mortgage, “Escrow is a legal arrangement in which a third party temporarily holds money or property until a particular condition has been met (such as the fulfillment of a purchase agreement). It’s used in real estate transactions to protect both the buyer and the seller throughout the home-buying process. Throughout the term of the mortgage, an escrow account will hold funds for taxes and homeowner’s insurance.”
In short, 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 real estate can be a game-changer, especially for those starting with limited capital. Want to learn more about it? Don't miss our exclusive video on How To Get Into Real Estate With NO MONEY! We delve into the ins and outs of real estate investing strategies perfect for beginners!
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 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.
Now that we have gone through the 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 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.
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.
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 within your reach.
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 key elements of a wholesale 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.
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.
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.
Wholesaling brings with it a multitude of questions, particularly surrounding the pivotal tool of the trade: contracts. As essential as they are, these contracts often come shrouded in misunderstandings, especially for new investors. Real Estate Skills aims to provide you with concise answers to your most pressing questions.
Wholesaling is a strategy where a middleman, or wholesaler, secures under-market-value properties and finds end buyers for those properties. Usually, these properties are distressed and purchased from motivated sellers, but they can also be fully renovated, move-in-ready homes.
A common method is an assignment of contract, where the wholesaler makes an agreement to buy a property and then assigns that contract to an end buyer before closing. This transfers the right to purchase to another party, who will then renovate the property and sell it for a profit. The wholesaler's profit comes from the difference between the price they set in their contract and the higher price paid by the end buyer.
This method is popular because it doesn't need any capital investment from the wholesaler, there are no closing costs, and payment can be quick.
Other variations of wholesaling include double closings and wholetail deals, which require the wholesaler to fund and close the property.
Wholesale real estate contracts are legal and are 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.
If the wholesale real estate contract prohibits assignment, there are two options you can consider: a standard Contract Assignment Addendum or a double closing.
Wholesaling real estate might seem overwhelming, but it offers significant benefits for both new and seasoned investors:
We've introduced you to the world of wholesale contracts and examined the wholesaling process in its entirety. It's clear to see how these contracts play a key role and what you need to be mindful of throughout the process.
Wholesaling provides both wealth creation and educational benefits for anyone interested in the real estate business. The method you choose - whether it's wholesaling, house flipping, or passive real estate investment - is entirely up to you.
Remember, your drive and determination will yield benefits far beyond financial gain. The rewards will be clear and tangible.
Legal contracts are a critical aspect of wholesaling, and they demand your serious attention. Read every contract thoroughly - knowledge is power when it comes to negotiating outstanding wholesale deals.
But don't stop here. Keep learning and expanding your real estate horizons. We invite you to join our FREE training program where we go deeper into the intricacies of wholesaling. It's an opportunity you won't want to miss, so register today and take the first step toward your successful real estate journey!
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