Take a second to imagine your ideal seller saying “Yeah I think that price will work. Where can I sign?” Those might be the best words anyone could say to you, especially if you’re new to wholesale real estate. However, if you’re not using the right contract, your dream scenario could quickly become a nightmare.
Before you know it, the deal has fallen through and your biggest competitor has swooped in, landed the deal, and assigned it for $50,000. It may sound dramatic, but this is a reality that far too many wholesalers have lived through simply because they didn’t understand how wholesale real estate contracts work.
We don’t want you to live this nightmare, so here are the three most important parts you can’t afford to leave out of a wholesale real estate contract.
What is a wholesale real estate contract?
Before we explore what your contracts need to have, let’s discuss what a wholesale real estate contract, also known as a real estate purchase and sale agreement, is.
Most residential real estate transactions involve one homeowner selling to another homeowner. While they involve a number of moving parts on the back end, the contracts are fairly straightforward. They detail the earnest money that’s held in escrow, the inspection period, the general closing date, and other important terms related to the transaction.
Once the buyer and the seller sign a real estate contract, the rest of the process is usually straightforward. The buyer finishes securing their financing, they hire an inspector, and the seller makes the repairs stipulated in the contract.
However, a wholesale real estate contract does not involve you purchasing the property. While we often talk about “buying distressed properties,” or “landing deals,” these are just industry terms that refer to signing a contract with a homeowner. In reality, the contract just gives you equitable interest, meaning you have a financial stake in the property, which gives you the right to sell the house to someone else.
As a result, wholesale deals take on a different legal structure, meaning there are a few key details you cannot afford to forget.
The assignment clause
Wholesale real estate revolves around assigning contracts to third-party cash buyers, who then pay you an assignment fee for finding the deal. While this is standard practice in wholesaling real estate, we highly recommend adding an assignment clause to your contracts.
Legally, all contracts can be transferred to a third party, unless specifically prohibited. However, an assignment clause makes your intention crystal clear to the seller so that there’s no confusion later on.
While you don’t legally need an assignment clause, real estate investors highly recommend having one. It ensures that sellers understand the kind of deal that’s taking place and prevents them from raising an issue when they find out you’re making a profit without closing on the house. Some motivated sellers have even tried to sue wholesalers for not stating their intention to assign the contract.
It’s also good to be as transparent as possible. Not only does it keep sellers from feeling misled, but it also protects your reputation and the reputation of wholesale real estate in general. State laws have grown less friendly to wholesalers over the years because some people have chosen to be dishonest. We recommend being upfront about your intentions to protect your business and the industry as a whole.
A thorough description of the property
Aside from the legal description of the property, which consists of subdivision or survey information, you should also include a thorough description of the property’s condition.
Often, wholesale real estate involves distressed properties that have been neglected or are damaged. These are usually the primary reasons the owner is selling at below-market value, but it’s a good practice to document home damage in the contract. This prevents any confusion about the state of the property and makes sure your cash buyer is aware of exactly what kind of house they’re buying.
Notable details to include are:
- Structural damage
- The state of the roof
- The state of any additional buildings, like sheds
- Significant internal damage
- Any obvious mold or mildew problems
Real estate closing information
Sometimes, coming to an agreement on closing details can be the hardest part of finishing a real estate deal. So it’s important to record these details in your contract so all parties know exactly what to expect from the beginning.
While some details, such as the closing time frame and purchase price, are straightforward, others can be up for debate. The most common issue lies with who is paying closing costs. In wholesale real estate deals, the cash buyer often pays the closing costs or splits them with the wholesaler because the seller can’t afford them. However, this is a detail that you don’t want to leave up to interpretation.
If you’re reverse wholesaling, clarify this point with the investors on your cash buyers list when you start working with them. Squaring away this detail ahead of time will help you avoid needless negotiations and phone calls once you have someone ready to sign.
If you’re following a traditional wholesale approach, ask the seller if they can pay closing costs before signing a contract with them. If they can’t, you’ll need to list this expectation in the contract. It may also impact how you find a buyer, so don’t leave this detail until the last minute.
Conclusion
Understanding wholesale real estate contracts is essential to building a profitable real estate business. Not only will this keep your deals from falling through, but you’ll also protect yourself from the accusation that you didn’t disclose information essential to the transaction.
However, nothing in this blog should be construed as legal advice. We highly recommend having a real estate attorney look over your contract before you put it to use. Otherwise, you risk including something you shouldn’t or excluding something vital.
You should also be careful if you intend to wholesale virtually, because wholesale real estate laws differ from state-to-state. Before you launch any marketing campaigns in a new state, talk to a state-licensed attorney. Some states, like California, have very specific laws that prohibit marketing deals in certain ways, so it’s always best to err on the side of caution when it comes to contracts and real estate.
