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The art of wholesaling - Part 2

By Rob Arnold

Real Estate Agent with Sand Dollar Realty Group, Inc. BK627826

April 20, 2008 06:00 AM

Wholesaling is alive and well in Central Florida. We just closed a deal last week for a 4 bed/2 bath block house in a working class neighborhood. It had a few last minute glitches, but it did close. Purchase price was $72,000 and the wholesale price to the investor was $81,000. That left $9,000 as an assignment fee. If you do the math, 9K/72K = 12.5%. If an average commission is around 6%, you can clearly see that the fee earned was over double on this deal. If all I did was list this property, I would have probably earned less than half of what I ended up earning from wholesaling it.

In this article I will explain how to put a property under contract and locate an end buyer.

The typical and definitely preferable way I structure these transactions is by assigning a contract. First of all I always use our standard Realtor contract which in Florida is called the FAR/BAR contract. I don't use contracts that these "gurus" create, and I definitely don't use contracts from some office supply store. Everybody (title companies, Realtors, lenders, etc.) is familiar with the standard Realtor contract and it is up to date with all the latest law changes and court cases, so why bother with the others. If I need to slant something in my favor I use an addendum. By using the standard form it also helps me set sellers more at ease that there is no funny business in the contract.

On For Sale By Owner transactions, I check off the box that says I may assign the contract and be relieved of all liability (the first box). On listed properties, I check off the box that says I may assign the contract but not relieved of all liability (the second box). The only reason for this difference is because most Realtors will object to the first box being checked off - they are afraid you may assign the contract and disappear. (As a matter of fact if your listing Realtor does not at least question this box being checked off, you probably need to fire them for incompetence.) If they do question it, then I simply explain that I may bring in a partner or associate and let them take title to the property but that I will stay in the transaction through the closing, so no worries.

Once the contract is all signed off, I explain to the owner or the Realtor that we will need to do various inspections of the property during the 10 day inspection period. (If I can't get at least 7 days for the inspection period, I will not even attempt to wholesale it unless I have a buyer in my pocket lined up.) Then during the inspection period in addition to ordering the inspections, I start shopping the property around to my potential buyers.

How do I find my buyers? Most of my buyers are regulars. I typically call or email my regulars and see if they are interested in the property based on the numbers I give them. Lately because many of my regulars are stuck holding lots of properties, I have had to expand my buyer list. As a last resort, I do have an email blast list that goes out to some 600+ investors, Realtors, and builders that I have been building on for years. I also am constantly advertising for new buyers. It usually isn't hard to find a wholesale property buyer as long as the numbers make sense.

If the house is occupied, my preferred method of showing it is via an "open house" . I bring all my buyers through doing one or 2 "inspections" during the inspection period. If the house is vacant, I do what I can to obtain a key from the seller so I can show the house myself. If for some reason I cannot find a buyer during the time period, or if I find buyers but they must buy at a lower price, then I have to make a decision. I don't want to string a seller along. (I decided many years ago that I would never put a property under contract that I would not personally close on. To do otherwise is not fair to the seller or the listing agent and is a bad business practice in my opinion.)

I quickly order building and other inspections on the property. That way if I need to close on the property, I am protected. Also the inspection allows me to possibly renegotiate the purchase price. Last Fall I used a detailed building inspection to renegotiate the original purchase price down about 13K and then I was able to assign the contract to another investor with the lower renegotiated price. The inspection report did show some serious damage to roof trusses in the attic and to the electrical panel in the garage. That's part of what an inspection is for anyway. An inspection can be a negotiating tool in addition to a safety net.

In part 3 of this article, I will discuss the paperwork involved and getting the transaction closed.

The art of wholesaling - or how to make far more than a 6% commission on a transaction - Part 1

(Disclaimer: All commission amounts in this post and comments are for example discussion only. Commissions are freely negotiable and not set by law.)

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Rob Arnold, ABR, CPL, CRB, GRI, Managing real estate broker, Licensed mortgage broker, Notary Public

407-389-7318 / 1-877-389-7318 www.SDRhouses.com/ www.WeBuyHousesFlorida.com/

Your full service and investor friendly Realtor in Orlando. Learn to invest in Central Florida real estate and Orlando real estate. Investor mentoring and counseling available. I also provide flat fee MLS listings, For Sale By Owner, and menu-based services in most parts of Central & South Florida, the Space Coast, and the Treasure Coast including Orlando, Winter Park, Maitland, Ocoee, Winter Garden, Apopka, Altamonte Springs, Casselberry, Longwood, Winter Springs, Oviedo, Lake Mary, Sanford, Deltona, Debary, Deland, Mount Dora, Eustis, Clermont, Kissimmee, Winter Haven, Lakeland, Tampa, Sarasota, Bradenton, Miami-Dade, Fort Lauderdale, West Palm Beach, Port Saint Lucie, Melbourne, Daytona Beach, Ocala, Gainesville, Volusia, Brevard, and more.

We buy houses cash, sell properties, and list properties throughout Central Florida and the metro Orlando area.

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Ron Parise

LocateHomes.com - Cape Coral, FL

First of all; if I was to do the math Id do it this way 9/81= 11.11% commission on the selling price. Still a significant improvement on a typical real estate commission. but not quite what you suggest.

However

If you picked the property up off the mls, the seller has probable agreed to pay a commission on the 72k. lets say 5% or $3600. So actually out of the 81k sales price there has been $12600 in fees and commission paid, before our poor seller gets his money

The questions I have when working with wholesalers is why would a seller agree to work with you when they can probably expose their property to the same group of investors through the services of a licensed agent and net more. And why would a buyer work with you when they can find the same properties on the mls. Not there aren't good reasons, Its just that I dont know what they are. Can you explain?

I know that what you do is done all the time, so its probably legal but....

As a licensed real estate agent and a NAR member, I am too concerned about the ethics of the situation to do what you suggest. You are bringing a buyer willing to pay one price, but delivering significantly less to the seller, pocketing the difference for yourself. I feel that to do this ethically, you need to be up front about what you are doing and be "at risk". ie have paid a meaningful, non refundable, good faith deposit. And you need to actually take title to the property yourself, before you sell it.

As an agent it seems a whole lot easier to just be honest with your seller and charge the the seller a 15% commission for your services.

I think you need to decide that you are a broker charging a commission, or a dealer, at risk, making a profit on an investment. I dont think you can have it both ways.

Apr 20, 2008 06:43 AM

Bryant Tutas

Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL

Selling Florida one home at a time

Rob, OK I think Ron has actually brought up some good questions. Questions that I have asked myself when trying to get my head around this. What say you?

Apr 20, 2008 07:12 AM

Rob Arnold

Sand Dollar Realty Group, Inc. - Altamonte Springs, FL

Metro Orlando Full Service - Investor Friendly & F

Ron and B Bryant - Let me elaborate some more. The numbers are what they are. Whether 11.11% or 12.5% it doesn't matter to me. I was just trying to make an example. All that matters is the $9000 profit. The HUD-1 shows a purchase price of 72K, so that is what I based it on.

If I can pick a property out of MLS and make both a buyer-side commission and an assignment fee, that is even better. It is harder in the MLS because you typically aren't communicating directly with the seller and the prices are usually higher than a FSBO. That isn't to say there are not plenty of deals in the MLS, just that FSBO's are easier to work.

The difference between taking a listing and putting it under contract is of course that with a listing, I am agreeing to try and help them sell the proprerty. Where with a purchase and sales contract, I am agreeing to buy the property subject to various terms and contingencies. As I mentioned in the post, I will never tie a property up with a contract unless I plan on buying the property. To do otherwise is unfair to the sellers and all parties involved. I put an earnest money deposit into escrow, so there is money to lose if it doesn't close. I have never not closed on a deal after the contingencies have been released. And if for some reason at the last minute, my end buyer flakes out, I step in and get it closed anyway in my name with my money and credit. I've had it happen on more than one occasion where 2 days before closing the end buyer backs out (and forfeits the deposit money they put up with me) and then I have to scramble to gather up all the money and close on very short notice.

A listing agent will never do that. They won't guarantee a sale. I will on my terms. If I approached a seller and said I want to take a 15% commission and I will try to find you a buyer, most would say "No thanks, get lost." But if I tell them, I guarnatee to have your property sold for cash within 30 days and you will net $xxx, that motivates them to sell to me.

Sometimes when I get a property under contract, I do realize after doing my own inspections or after having potential buyers look at the property that either I made a mistake with my numbers or I underestimated repairs or some surprise defect popped up. This to me is a legitimate reason to re-negotiate or get out of the contract. In fact that is the whole reason that there is an inspection period. I seldom use the inspection period to re-negotiate or back out, but on occasion it happens. In fact when I took the FAR/BAR contract workshop class last Fall, the attorney doing the class said they specifically changed language in the contract so that the inspection period could be used to back out even for buyer's remorse.

Another thing I always do in my contracts is (1) put a statement in it that I am a real estate broker, and (2) that I am buying the property for the sole purpose of making a profit. It is an arm's length transaction, so each party is only looking out for themselves.

In the closing from last week, the seller was about 90 days behind on their mortgage payment and the house needed a new roof (active leaks) and a bunch of other repairs. The seller actually had their electricity shut off and was living in the dark for the last 30+ days with their kids and pet Rottweiler. (Sounds lovely doesn't it.) There is a big difference between what I could do as an investor as opposed to just a listing agent. The seller named their price, I paid all closing costs. I also agreed to let the seller do a 30-day lease back after the sale with no rent, and my end buyer had to agree to that as part of the assignment of contract. If this was just a typical listing in the MLS, this closing never would have happened as scheduled based on the above scenario.

I am not cold-hearted about the situation. There have been several times where people told me that they just wanted to get rid of the property for what they owed. I knew I was getting a steal and the seller was asking for no profit. I have on many occasions told the seller that I would give them a net check of $1000 for cooperating with the transaction even though they didn't ask for it. In the above closing, what the seller wanted in addition to the price they named was a 30-day lease back. I met their needs and closed the deal on time.

Apr 20, 2008 09:59 AM

Anonymous

Rob Arnold, Florida Realtor / Investor

Ron - I think I failed to answer some of your questions.

The sellers I am dealing with aren't contacting me to list their property, they are contacting me to sell their property to me immediately with minimal hassle. I do significant advertising to buy properties via my website www.webuyhousesflorida.com and other ads. So the people contacting me aren't looking to list. If they were, I can understand the ethical concerns. Net listings are considered unethical by NAR, so I wouldn't do them. Remember listing agreements aren't arm's length transactions while purchase and sales contracts are.

Whether I take title or not, there should be no issue. The standard Realtor contract approved by the Florida Association of Realtors and the Florida Bar has written clauses that allow it to be assigned and even require them to be checked off.

My post was meant to answer some common questions and situations that come up. You have to answer people's questions.

Most of these deals are FSBO deals, so the buyers won't find them on the MLS. They will only find them from me or via their own advertising. In fact it is my observation that the best deals never make it to the MLS, somebody snatches them up before they ever get on there. Even so, sometimes buyers need you to draw their attention to a property even if it has been listed for months.

Apr 20, 2008 03:18 PM

Bryant Tutas

Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL

Selling Florida one home at a time

Rob, You answered Ron's questions perfectly. What made the most sense to me was the "guaranteed sale" as opposed to listing and tring to sell.

I really liked this post and learned alot from it. "getting my head" around wholesaling has always been a problem for me for exactly the reasons Ron pointed out. But now I thing I get it and can see where there are sellers who would welcome this service.

Thank you!!

Apr 22, 2008 12:37 AM

Anonymous

Jonathan Rivera

I like the way that you handled Ron's questions. It's always funny to me how people who are not involved in the investor side of the buiness hide behind "ETHICS" excuse.

Anytime people don't undesrtand how things work they automatically say it's unethical or illegal. Great job and keep up the good work.

I just completed my first blog, and I would like to invite you to read it and comment.

Apr 27, 2008 02:15 AM

Rob Arnold

Sand Dollar Realty Group, Inc. - Altamonte Springs, FL

Metro Orlando Full Service - Investor Friendly & F

Broker Bryant - Thanks for the comments. I plan on doing a third article on this soon. Wholesaling isn't for everyone. Buying houses from distressed sellers is simply another need that needs to be met.

Jonathan - I think Ron's questions are legitimate. It is very important as a real estate professional to disclose even further. There are obvious issues that need to be addressed when wholesaling and there are some fine lines that should not be crossed either. I tried to find your blog, but could not. Can you send me a link?

Apr 27, 2008 03:17 AM

Jonathan Rivera

R-Homes, LLC - Sanford, FL

You can find my blog at wordpress.com

jonthansblog. wordpress. com/2008/04/28/short-sales-are-looking-good/

Just remove the spaces.

May 01, 2008 08:35 AM

Anonymous

John Lydic

An agent who gets it! You're rare, buddy. Good job splainin'.

Jan 17, 2009 06:48 PM

John Palmisano

Keller Williams Properties Weston, FL - Weston, FL

Rob, good work, you are actually helping the market by getting houses sold. I am surprised you actually have rehab guys that can borrow hard money. Down here all of the hard money guys have gotten real strict and will only loan max 50% of ARV.

Jan 18, 2009 07:22 AM