In this article, I will go over the actual structuring of wholesaling a property to another investor. There are basically 2 different ways to structure this type of transaction. One way is to assign the contract to the buyer, and the other way is to do a double closing a/k/a a simultaneous closing. How I structure this for the most-part depends on the amount of my profit.
If my assignment fee is more than $10,000, I like to do a double closing. The main reason for this is because the other parties often get greedy. If the seller sees an assignment fee of $15,000, they might just balk at the deal because they feel they are getting short changed. I have had sellers actually refuse to close and try to renegotiate with me at the last minute. The same goes for buyers. If they see I am making a giant profit, they might try and go behind my back or backout of the deal entirely solely because they don't like seeing my profit being so big. With a double closing, neither party gets to see the price that the other party is getting for the property. However with a double closing, I often have to dig up my own money to close on the property, and I also have to pay 2 sets of closing costs. So there are certainly some drawbacks to having two closings.
I used to just use a generic assignment of contract and simply get a non-refundable deposit from the buyer, but I got burned one time too many. Buyers sometimes like to do things like back out at the last minute, or assign their assigned contract to another buyer, or go back to the seller and try and renegotiate the deal, or ask for a last minute extension. Lots of things can go wrong. So over the years I developed my own special assignment form. Actually I just recently changed my form again from a "conditional assignment of contract" to an "intent to assign contract."
With a house purchase contract, the buyer does not get any rights in the property until the closing happens and the seller gets paid. With the "intent to assign contract," the buyer does not get any rights in the contract until I get paid my assignment fee in full (which normally happens at closing).
My intent to assign contract form lays out my rules for the buyer buying out my interest. Among other things it (1) prohibits the buyer from further assigning his interest without my written permission; (2) prohibits the buyer from modifying or changing the terms of the original contract with the seller until the contract actually gets assigned; (3) holds me harmless from basically everything and makes the assignment non-recourse; (4) waives trial by jury and requires the loser to pay the winner's attorneys fees, etc.; (5) makes the buyer put up non-refundable deposit money with my title company and forfeit it if they do not close as scheduled; (6) makes the buyer close in escrow 1 day before the actual contract closing date (or whenever I decide), so that in case they backout I have time to scramble together the funds for me to close.
My form also clearly discloses that the sale is totally "as is where is" and that the buyer has no contingencies whatsoever to get their deposit back unless the seller cannot close as scheduled. If a buyer starts complaining about my form, it is a strong sign that I may need to fold up my papers and walk away from that buyer. I want to deal with players and not wannabe wishy-washy investors who end up not closing.
With double closings, I basically use a standard as-is Realtor contract but put in a contingency for the first closing occurring by a certain date. If I can't get the first closing (with the owner of the property) done on time, I don't want to be liable for any damages because the second closing did not happen as scheduled. I also have a special addendum I add to the contract that makes the deposit money non-refundable, relieves me from all liability from the property condition, and allows for a special warranty deed (instead of a general warranty deed).
Just like most real estate transactions, there are often some interesting wrinkles that come up. Hopefully this article will help you avoid some of the pitfalls that can often come up when wholesaling properties to investors. If you want to see my forms, just contact me and I will provide you a copy - of course use them at your own risk.
(Disclaimer: All commission amounts in this post and comments are for example discussion only. Commissions are freely negotiable and not set by law.)
(Copyright © 2008. Sand Dollar Realty Group, Inc. All rights reserved.)
Rob Arnold, ABR, CPL, CRB, GRI, Managing real estate broker, Licensed mortgage broker, Notary Public
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 sell properties, list properties, and we buy houses cash throughout Central Florida and the metro Orlando area.