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Wholesale real estate encourages owners to sell their property below market value. Not surprisingly, it raises legal and ethical issues. But this business strategy, when done properly, does work in the interest of all the parties—the wholesaler, the seller, and the end buyer.
For this investment strategy to work in your favor, you must be adept at writing effective contracts. This article covers all the elements you need to include in the agreement. We’ll also touch on the pitfalls of engaging in wholesale real estate, so you know what you’re getting into.
First, let’s define wholesale real estate and the contract it requires.
Wholesale real estate contract: understanding the concept
Wholesale real estate involves a wholesaler acting as an intermediary between the actual real estate buyer and the seller. The wholesaler seeks out a viable property, seals a deal with the seller, finds a buyer, and then connects the buyer with the seller. This business strategy allows wholesalers to make a quick buck from assignment fees.
Wholesale real estate involves a wholesaler acting as an intermediary between the actual real estate buyer and the seller.
The process starts with a wholesaler signing a purchase deal with the seller to gain limited control over the property for a certain period. Once the wholesaler finds an interested buyer, they assign a wholesale contract to the buyer, granting them the exclusive right to purchase the property.
This assignment contract transfers all obligations from the wholesaler to the buyer. The buyer can then purchase the property directly from the seller.
Wholesalers typically work with motivated sellers willing to sell their property off market. Often driven by an urgent need to sell the property, motivated sellers are willing to accept the offer below market average and the terms investors insist on.
Questions of legality frequently arise since wholesalers are selling property they do not own. Wholesaling is legal, but you could still find yourself in hot water if you don’t do it the right way. For one thing, you can’t sell the property on behalf of the seller, as that would constitute brokering (which requires a license). You can avoid legal trouble by using a wholesale real estate contract.
You may also grapple with ethical issues. One of them is whether you should just advise the seller to turn to a licensed broker and sell the property at market value. The antidote to this dilemma is to practice full disclosure. Some sellers still prefer wholesaling, as it allows them to work with wholesalers who already have a pool of buyers ready to close the deal and meet their urgent need to sell the property.
Your wholesale real estate contract is only legally valid if it has all the necessary elements. They are all listed in the next session.
The key elements of a wholesale real estate contract
Your wholesale real estate contract must protect the interests of all the parties involved. And it can only do that if it’s legally sound. So, make sure your agreement contains all the required elements.
- Parties involved: the legal names and signatures of the buyer and seller
- Description of the property: the property type, legal description, street address, and assessor’s parcel number (APN)
- Condition of the premises: the property’s physical condition, defects, deficiencies, and previous repairs
- Purchase price and financing details: the agreed-upon sum the buyer will pay for the property, deposits, and financing terms
- Closing date: a date that terminates the assignment agreement and the wholesaler’s right to buy the property
- Contingencies: clauses protecting the interests of all parties
The type of contingencies to include will vary based on the requests of each party. Here are the most common contingencies you will find in a proper wholesale real estate contract.
It’s a typical practice for wholesalers to facilitate the sale of properties to flippers. So, it comes as no surprise that the world of wholesale real estate often involves distressed properties. Inspection contingencies allow wholesalers to take the necessary precautions, so they don’t end up dealing with a worthless or unsellable property.
The contingency often specifies a period when the investor is allowed to inspect the property and back out of the deal if they discover serious issues, such as foundation damage, structural defects, or mold.
Sometimes a buyer cannot pay the full amount to purchase the property. The financing contingency allows them to cancel the agreement without penalty and get their deposit back.
Default clauses determine how the parties shall proceed if one of them backs out of the agreement or fails to meet their end of the bargain.
The buyer’s default clause outlines the seller’s rights if the buyer backtracks from the agreement, while the seller’s default clause protects the buyer if the seller fails to meet their obligations.
Property insurance protects the buyer’s investment from losing its value due to disasters and natural calamities. It also guarantees they can take out loans to cover mortgage payments. Most lenders won’t approve a loan unless the property is insured.
The insurance contingency allows the buyer to walk away from the contract if the property turns out to be non-insurable.
Risk of loss and damage
The property must remain in the same condition as described in the agreement. If any further loss or damage occurs while the property is under contract, this contingency clause protects the buyer.
Right to assign contingency
This type of contingency is specific to a wholesale real estate purchase agreement. It gives the wholesaler leeway to cancel the contract if they’re unable to transfer rights to a buyer within the agreed timeframe. It also protects the seller, who can work with other buyers in the traditional way if the wholesale contract does not work out.
Aside from ensuring your contract is well-crafted, you also need to be aware of the negative aspects of a wholesale real estate business strategy.
What to watch out for in the wholesale real estate
Investors venture into wholesale real estate because it promises quick profits and requires relatively little investment. It also has almost no entry barriers, as no credit check or a real estate license are necessary.
Wholesaling is your best option if you’re only breaking into real estate and would like to network and learn the industry’s ins and outs. It is also ideal for sellers who are in a hurry to sell their property. But it is not without its pitfalls. Watch out for the following.
No guaranteed income
A major drawback for wholesalers is that this strategy is not ideal for those looking for a steady income. The fact that you have found a distressed property does not necessarily promise profit. Closing the deal is a long journey that does not always end with a sale.
Lower profit margin
When you do complete a wholesale transaction, the profit won’t be as large as it would be if you followed a traditional real estate buy-and-sell business model. After all, the less risk you take (unlike, say, house flippers, you won’t be purchasing the actual property and won’t be shelling out a lot of money), the smaller the reward.
Distressed properties are not easy to find
Only motivated sellers will agree to off-market prices, and they’re usually selling distressed properties. Such properties are not always readily available. Wholesalers will have to scour newspapers and drive around towns and cities to find them. Or they can get creative and develop social media and print ad campaigns.
Finding buyers takes time
It’s best to have a sizable list of buyers before you take on a seller. That way, you can avoid putting in much effort only to find no buyers. The problem is that it takes time to build a viable list.
Sure, wholesaling has its drawbacks. But with the right know-how, you can avoid these pitfalls and make a killing in the real estate industry. Once you’ve mastered the art of wholesaling, your main concerns will be limited to operational matters, such as how to efficiently draft multiple contracts.
Wholesale real estate is a unique business model that allows people with limited resources to get their foot in the door. It offers an opportunity to infiltrate the real estate industry and build wealth over time. You’ll quickly learn the industry’s ins and outs and even venture into bigger transactions.
Just as you need networking and marketing skills to succeed in this field, you must be able to draft contracts that protect your interests and keep you out of legal trouble. Fortunately, there is no shortage of readily available contract templates and tools that will make it easy for you to quickly complete agreements and close deals.
You can turn to AXDRAFT for contract automation, which speeds up the contracting process with its file storage, metadata, analytics, and drafting tools.