Wholesaling Real Estate Explained!

By
Services for Real Estate Pros with Clever Investor

 

Today I am going to share with you the answers to the top seven questions most folks have about wholesaling real estate for profit.

When I was a little kid I wanted to be a rockstar!  I loved the fact that they get to do what they want…however they want...without any fear of the consequences.  They get to live their wildest fantasies while getting wealthy at the same time.  I only had one hurdle to overcome if I was going to be a rockstar, too…I can’t carry a note in a bucket or play any instruments (except the cowbell).

That’s why I got into real estate instead of rock and roll.  You see, real estate (and all the easy money I make from it)  enables me to live the rockstar lifestyle without having to write music, cavort around a stage, or deal with all the annoying groupies. ;-)  I must admit…it feels pretty damn good being able to take extravagant vacations, eat at the poshest restaurants, buy whatever big boy toys I want.  You have to finally experience it for yourself to fully appreciate it!  I want to help you!

If you think you'd like to live this way then it is time for you to become a real estate rockstar.  In todays edition of my Active Rain blog I am going to cover the top 7 questions I often hear when it comes to learning how to wholesale real estate for big time profits.  Wholesaling is the fastest way to make A LOT of money in real estate without having to take on any risk or borrow any money from a financial institution, another investor, or your mom.

QUESTION #1: What Does Wholesaling Real Estate Mean?

ANSWER: When talking about how to wholesale real estate, we are really talking about controlling/owning a real estate asset at a SIGNIFICANT DISCOUNT then re-selling that asset for a modest profit to either an investor or resident. The key is having “equitable rights” in a property. This means that you have the right to market and sell a piece of real estate without putting up any money to actually own the real estate. You gain “equitable rights” by placing a property under contract using an option agreement, or a purchase and sale agreement.  Check out this blog post where I teach how to wholesale real estate step by step.

QUESTION #2: How Does A Real Estate Wholesaler Make Money on Real Estate?

ANSWER: Once a property is under contract by way of an Option Agreement or a Purchase and Sale Agreement the Wholesaler markets the property to their own buyers list, online, and at networking events. When they find an interested buyer they can simply “Assign” their rights over to the new buyer or complete a “Double Close” also known as a “Simultaneous Closing”.  Wholesalers make money on the transfer of the tangible asset.

QUESTION #3: Can You Explain What It Means To “Assign” Or “Double Close”?

ANSWER: When learning how to wholesale real estate, there are essentially two ways to get paid. The first is by assignment, and the second is through a “double closing”.

In short, if you are making less than $5,000 on the deal then you will want to “assign” the contract, because it is cheaper to flip the property this way.  In an assignment you are simply “assigning” your right to buy that property to another investor that is willing to pay you an “assignment fee” to step into your shoes.  They get the property and you get a check.

With a double closing, you are essentially buying a property from a motivated seller (bank, or an individual) for a significant discount from retail value. Let’s call this the A-B transaction and the contract is between you and the seller.

Once you have the property under contract and open your A-B escrow, you begin marketing the property for sale at a higher price to find a cash buyer. When you find one, you again place the property under contract for sale at a discount from retail and open escrow. Let’s call this the B-C transaction and the contract is between you and your end cash buyer.  

The difference between “significant discount” and “discount” is your spread (and profit) you will make as a wholesaler.

When your closing agent goes to close the transactions, they will use the end cash buyers money sitting in the B-C escrow to “flow” over to the A-B escrow and close out the sale between you and the motivated seller.

Once closed and recorded, there will be remaining funds sitting in the B-C escrow which will get closed, recorded and distributed to you.  This is your profit.

The upside to doing a “double escrow” is the fact that you can make a lot of money and no one in the transaction will know how much you made until the deal is over.  Your finder's fee is totally non-negotiable.

The downside is that you are essentially doing two escrows so you will have two sets of closing costs which eats into your profits.

QUESTION #4: As A Real Estate Wholesaler / Investor, Can I Use The “Standard” Association Of REALTORS Residential Purchase Contract When Wholesaling real estate?

ANSWER: YES, in most cases you can as long as you add a few important clauses to protect you as the Wholesaler. You can pick up the contract at the office of your local Association of REALTORS in your town. Typically they only sell hard copies (not electronic) so you may have to have someone re-create the document for you.  When learning how to wholesale real estate it is always a good idea to have both a custom “investor” set of contracts as well as the Standard Association Of Realtor contracts.  Cover all your bases.

QUESTION #5: Are There Any Advantages To Using The Standard REALTOR Contracts Over A Custom One My Attorney Created Or The One I Got At A Seminar?

ANSWER: The more “standard” you can make your deal seem…the better. You never want the buyer or seller to think you have an “unfair advantage” over them. This is especially true if you are dealing with a real estate agent that is representing a certain party. As long as you add some clauses that protect you in the deal then you should be o.k. using standard forms.

QUESTION #6: But Cody…Do You Use The Standard REALTOR Contracts?

ANSWER: Sometimes I do. Especially if I am making an offer on a Bank Owned Home (REO) or one listed on the Multiple Listing System (MLS). If I am dealing directly with a Motivated Seller then it depends on the deal itself.  The contract is important.  Of course.  But you can incorporate your important clauses into a standard agreement so it still reads like a standard contract rather than having several pages of special addendums.  

If the homeowner is in Foreclosure then I use a custom contract that CLEARLY favors me as the buyer and when I assign this contract to my end investor they typically appreciate the protection! As far as selling real estate that I already own (meaning that I actually closed on the transaction myself) then I typically use the standard REALTOR contracts with all my special clauses that I add.

Standard contracts have been around a while and they work just fine.  We all use them.  You just have to make sure your standard contract covers all the necessary bases.  

QUESTION #7: What Clauses Do You Recommend I Add To The Standard Association Of REALTOR Contract?

ANSWER: I highly recommend creating completely different clauses when buying than when selling!

When buying you want clauses that 1) Protect your earnest money. These are escape clauses such as inspection clauses that allow you to back out of the deal for any reason during your inspection period. 2) Disclose that you are in investor and intend on making a profit. Be very clear you are not lending the person any money, or representing them in any way (especially if the seller is in foreclosure). 3) Give you the right to show the property at your discretion and without much notice. 4) Allows you to extend out the closing if need be without penalty. While this last one can be hard in a Sellers market…it is fairly easy to get approved in a Buyers market!

When selling you want clauses that 1) Enforces the end-buyers earnest money (which I normally make them put up at least $2,500 NON-REFUNDABLE). 2) Reiterates the fact that I am selling the property for CASH and AS-IS with no inspection period. 3) Ads a penalty if they do not close on time. This can be done by saying something like “Closing may be extended by 10 days if buyer deposits an additional $1000 NON-Refundable earnest deposit and pays a $50 per diem”. 4) Explains I will refund all earnest money if I cannot pass the end-buyer “Clear Title”.

Ask your local real estate title company, attorney, or real estate agent for help when creating your clauses and learning how to wholesale real estate.  Once  you've created your contracts and fully understand them you will be in fine shape for the majority of your wholesale deals.

How To Wholesale Real EstateWell I hope your full of wholesaling excitement and ready to rock it out and take your real estate business to the next level so you to can live the rockstar lifestyle.  And let’s be honest with each other…the only wealthy person I know that plays cowbell is Will Ferrell.

You will only be successful if you take immediate action on your new found knowledge and go out into your local target market and get to work.  No one is going to make it happen for you so I encourage you to put yourself out there and give yourself permission to fail.  Failure is part of the success process and many of the greatest athletes, scientists, and business people made mistakes along their journey to the top.  They achieved greatness because of their willingness to take action and put themselves out there.  Paralysis of analysis only costs you time and money - it doesn't earn you anything.

Remember that Specialized Knowledge + Purposeful Action = Success and that Clever Investor always strives to bring you the best real estate investment education found online!

America’s Rockstar Wholesaler,

Posted by

Cody Sperber SignatureCody is the founder and CEO of Clever Investor, the industry's premier source of quality real estate investing education. Cody has successfully closed many different types of real estate transactions including wholesale deals, short sales, multi-unit, subject to, lease options and his own proprietary investing strategy, the Reverse Short Sale. As a new investor Cody quickly gained a huge competitive advantage by mastering online lead generation, building one of the most successful real estate investing firms in the Arizona market. His companies have bought and sold hundreds of millions in properties and he has enjoyed several years where he's closed hundreds of real estate transactions. Before real estate Cody served time in the Navy and attended Arizona State. He is now married to his best friend and they have two beautiful children (Hudson and Brynlee).  Cody most recently published the Start Closing Deals course on real estate investors.

 

Comments (8)

Ciara Brennan
Mass Homes Realty - Hanover, MA

Hi Cody, I am finding that a lot of bank owned properties will not allow the P+S to transfer to a different name before closing.  How do you overcome this?

Nov 26, 2012 05:59 AM
Cody Sperber
Clever Investor - Chandler, AZ
CleverInvestor.com

Hy Ciara,

First off...thanks for commenting.

Second, what I think your talking about is really a two fold problem many investors face now-a-days when trying to flip REO's.

Problem #1 - The contract will not allow "Assignments".

Problem #2 - The banks place a "Deed Restriction" inside the closing paperwork.

So this means that you probably have to close on the deal.  But below are some suggestions...

__________________________________________

As far as I know...there is no easy solution to the "Assignment" problem unless your dealing with a little local bank and you can talk them into the fact that your simply "assilgning" the property because you decided to partner with someone on the deal.

As far as the deed restriction there are a couple of ways around this...unfortunately...none of them are easy.

Way #1 is to have your back-end-cash-buyer act as a lender instead of a buyer.  Create a "Note" and "Deed of Trust" (or mortgage if your state uses them instead) for the amount of your sales price (including your profit as the wholesaler).  The day after the "deed restriction" ends have the note "due in full" at which point you have some pre-signed documents sitting at title that clears the lien, and "deeds" the property over to the lender / buyer.

If they need access to the property during the "hold" period...simply create a rental agreement and have the monthly rental amount equal to the property insurance.

Way #2 is to use an Option Agreement where the "Option" payment is equal to the sales price (including your profit as the wholesaler).  You can do the same thing where you create a rental agreement where the payment is equal to the cost of property insurance.

Obviously there are some paperwork logistics that have to occur and your closing agent should be able to help you with those.

Hope this helped answer your question!

Cody Sperber a.k.a The CleverInvestor

http://www.CleverInvestor.com

Nov 26, 2012 10:44 AM
C. Lloyd McKenzie
Living Albuquerque - Albuquerque, NM
Living Albuquerque

Good Evening Cody,

Excellent information for us to ponder.

Nov 26, 2012 11:34 AM
Sherry Chastain
Hendersonville, Nashville, Old Hickory, Lebanon Tennessee - Hendersonville, TN
Realtor, Selling Homes, Lake Properties,Luxury Homes,Short Sales

Sounds like fast money. Not so sure it works in an area with low inventory.                                                                                                                                                                                        

Nov 26, 2012 02:00 PM
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

Cody - This is something I'm sure a lot of potential investors are interested in learning.

Nov 26, 2012 02:21 PM
Cody Sperber
Clever Investor - Chandler, AZ
CleverInvestor.com

Thanks, Christine.  I really enjoyed sharing it.

Nov 26, 2012 07:39 PM
Lawrence "Larry" & Sheila Agranoff. Cell: 631-805-4400
The Top Team @ Charles Rutenberg Realty 255 Executive Dr, Plainview NY 11803 - Plainview, NY
Long Island Condo and Home Specialists

There must be investors who are doing it all wrong and this will give them some insight to the challenges...

Nov 26, 2012 09:06 PM
Ciara Brennan
Mass Homes Realty - Hanover, MA

Thanks for answering my question with such in depth information. Much appreciated!

Nov 26, 2012 10:32 PM