The basic idea behind wholesaling is to place properties under contract for big price reductions, then sell the paperwork to cash buyers for a discount. The difference between the price you pay for the contracts, and the money you receive from the cash buyers, is your profit. As a wholesale investor, you will have to do plenty of advertising to encourage distressed property owners to contact you.
These types of sellers are extremely motivated, and will want you to snap up their properties straightaway. This is a key part of this real estate investing strategy, because you can capitalize on their desperation and arrange to put their properties under contract, for substantially less than their true market value. At this stage, it is crucial that you negotiate a contract price that is sufficiently below the retail price, because this paves the way for everything that comes next.
You will acquire what are known as ‘equitable rights’ to a property, once you put it under contract. By doing this, you will be able to readvertise it and sell it to make a sizable profit. One way of approaching this is to advertise the property through conventional channels to locate a cash buyer.
Then, you can barter with the buyer and place the property under contract for a big price reduction.
Alternatively, you could market the property to your existing cash buyer database (assuming you have one), and wait for one of these prospects to make you an offer. Bear in mind that this method only produces a worthwhile profit if you obtain the property for a substantial discount, rather than a regular discount. Typically, to do this, you will have to purchase the real estate from a distressed seller.
Wholesaling for Big Profits: The Best Closing Methods to Use
One proven way to close out transactions and make a profit is the ‘double close’ method. Sometimes, this is referred to as ‘the double escrow’ or ‘simultaneous close’. This is a good approach to adopt if you wish to prevent your seller from finding out who your back end cash buyer is, or if you wish to keep your profits private. There are four stages to this process:
Firstly, you place the house under contract for a substantial price reduction from a distressed seller, with your own buyer side paperwork. Next, you have to advertise the house for sale during the agreement, to fund the period of closing for a back end cash buyer. Once you locate a buyer, you will need to negotiate with them to place the property under contract, using your seller side paperwork.
Therefore, at this point, there are a couple of transactions occurring. One transaction relates to the property acquisition. The other transaction is the sale to the back end cash buyer.
Next, you will need to set up a couple of escrow accounts, with a title company that approves of double closing. Perhaps, where you live, you are using a lawyer rather than a title company. If so, you will have to check that the lawyer is happy with this type of double closing strategy.
When the agreed closing date arrives, you will have to use the back end cash buyer’s money to complete both of the above mentioned transactions. That is to say, you will have to pay the distressed seller the price you decided on, then take the remaining funds as your profit. Essentially, you pocket the difference as the wholesaler, and the deal will be finished.
Although all of this is revealed, it occurs at the same time – without the seller or buyer really being aware of the transaction details. This is the main advantage of the double close approach. However, completing these types of transactions is more costly, because you have to pay two lots of closing fees. This is why you should only attempt a double close if you really don’t want the seller or buyer to see the transaction details, and if you will earn enough profit to cover the additional expense.
Another popular wholesale closing method is the ‘contract assignment’ approach. This is one of several types of ‘no cash down’ deals. You will have to put the name of your company, or your own name, in your buyer side paperwork (i.e. the agreement you made with the first seller). This contract should have an ‘End or assignee’ clause, which allows you to assign the contract to a different buyer in return for payment. The idea is to place the property under contract for a substantial price reduction, using your buyer side paperwork. Then, you sell that agreement to the back end cash buyer, using a single page assignment contract.
After you locate a back end cash buyer who is interested in the deal, you just assign them to your single page assignment contract, and then give all the relevant documents to the closing agent. By this stage, you are essentially finished, because you have signed away your rights or interest to that property, to that contractor, and to your back end cash buyer. The assignment contract should state the identity of the new back end cash buyer, the assignment fee that you will get at closing, and how that payment will be made.
An assignment is an excellent way of flipping a contract, providing that you are happy for everyone involved to know how much profit you will make. If you believe that the back end cash buyer or distressed seller will become exasperated, because you are earning too much profit from them, you will not want to close the deal in this way. Instead, you would be better placed to use the double close approach detailed above.
There’s no doubt that real estate wholesaling offers life changing profit potential. It is possible to start with bad credit and no money, and grow a tidy nest egg, while flipping properties on a part time basis. Take heed of the above advice, and it can make a positive difference to your life as well.