Wholesaling real estate is fast, low-capital, high volume business that is great for new and experienced real estate investors alike.
In this guide, we're going to take you through everything you need to know about real estate wholesaling contracts.
Let's dive in!
What Is A Real Estate Wholesale Contract?
First, what is a wholesale contract anyway?
Basically, it is a legal document between the property between a real estate wholesaler and a home seller, essentially giving a certain investor the right to buy the property.
As a wholesaler, you’re a middleman, and your job is to locate potential deals and immediately secure rights to them. Then, you assign a contract to a real estate investor.
It is actually similar to a purchase agreement (which we recommend you learn), but they are indeed different.
There are mainly 3 ways to approach a contract in the wholesaling space:
“Double Down” Contracts (Double Closing)
We will focus on the more common 1 & 2 methods, but we’ll elaborate briefly on method #3.
Reverse wholesaling is the process where the investor seeks out a buyer BEFORE they even have a property ready. By going “reverse”, the investor will already have a buyer lined up the minute they pull the trigger to initiate the wholesale contract.
It is considered by some to be a more efficient way of doing things, as it helps the investor have a better idea as to what type of deal and buyer he's looking for.
Let’s start exploring the two main methods which are being used by RE wholesalers.
First, the “Double Down” method.
What is a Double Close Real Estate?
The more common phrase or name for it is back-to-back closing, and it's exactly how it sounds.
An investor will purchase a certain property, only to resell it as fast as he can without rehabbing it. It could take as fast as 3 hours and can delay as long as a few weeks. Honestly, this method isn't all that different from traditional buy-and-sell; they're just closed faster.
So, two transactions occur in a double closing process. The first transaction obviously involves the investor and the seller. The second transaction will have the investor sell the property he just bought to a newer buyer.
Each of the two transactions will have separate escrow and settlement statements, as they are two independent transactions.
The settlement statements act as a summarization for all fees, charges, and unique financial clauses incurred by both parties of the transaction. It is also known as HUD-1.
The settlement statement is an integral part of both transactions of the double closing process.
Now let’s talk about how you actually execute a double closing.
How to do a Double Closing
Double closing is the less preferred method by wholesalers, due to the fact that it requires more “skin in the game”. Not only do you need to take legal possession of the property with this method, but you also lose some on the bottom line from the costs relating to the closing process of TWO transactions.
It’s a good option to have as a plan B if you need to get creative sometimes.
If you do decide you are going to use this method, here are 5 guidelines:
Find a deal: First, find a property to purchase. It needs to be at a serious discount for you to make money by double closing it. Meaning, you should be able to purchase at a price that allows the investor to flip it for profit, if not, it is unattractive, and you’re stuck with it.
Run the numbers: You should do the number for the next buyer, making it easier for them to say yes. You need to show them convincing profits, and how much of an opportunity this is for them.
Find a buyer: Before you buy a property, have the person buying from you ready in advance. This way you should be able to do it efficiently and minimize the risk of holding on to it longer. If the person buying from you is using a loan, make sure their loan allows for it.
Buy the house from the seller: Buy homes from original owners, just like a regular transaction. Pay the closing costs, and receive the settlement statement.
Sell the house to the new buyer: Sell as fast as possible to your new buyer. A traditional sale, with a new settlement statement. Costs should be calculated in advance.
Important note: Unlike an assignment contract, a double closing will actually witness the investor take legal possession of the property. This means you can show up on the chain of ownership (or chain of title).
Now, let’s talk about the most used method in wholesaling - assignment contracts.
Wholesale Real Estate Assignment Contract
This type of contract is initiated when the owner of a property agrees to sell their home to an investor and signs a contract that binds them to said deal.
The result means the investor now holds the right to buy the property, which allows them to sell to another buyer.
Notice the distinction. They aren’t selling the home. They sell the RIGHTS to buy the home.
When you sign a wholesale real estate contract to purchase a property from a seller, you now have an equitable interest in the property. This basically enables the buyer to become the equitable owner of said property, while the seller keeps the legal title to said property.
Simply put, although you won’t have the title to the property, you’ll be able to control it by means of a contract. Remember that every state and county have their own laws pertaining to wholesaling and you should be wise to check them prior to engaging in this sort of deal.
Next, you’ll have to assign the contractual rights to an investor, which means an assignment of real estate purchase and sale agreement. This document will basically state that the new buyer is taking your responsibilities, including the purchase of the property using the agreed terms in the purchase and sale agreement.
It is crucial that the new buyer is informed of such stipulations, and he understands the layout of the original deal or contract. He needs to agree to all prices, terms, contingencies, and conditions.
You should attach a copy of the purchase and sale agreement to the Assignment of Real Estate Purchase and Sale Agreement.
This way, you ensure the new buyer is not only aware of the original sales agreement but has a copy that discloses all addenda that were made in the deal.
As part of the process, you will collect a profit for your work. The terms of how you get paid will be included in the Assignment of Real Estate Purchase and Sale Agreement. Usually, wholesalers are paid a deposit when the Assignment of Real Estate Purchase and Sale Agreement are signed; and the rest you get afterward, at closing.
We highly advise not to cut corners here.
Have an attorney review the documents and contracts to ensure they’re correctly written for what you’re trying to accomplish. What may be cheap now, may prove more expensive later.
This method presents a few obvious benefits:
You don’t need to put up any of my own cash.
You don’t need to take any liability as a property owner.
You won’t need to stress out you can’t find a buyer immediately (because once the purchase agreement expires, you’re free to walk away from the deal).
While there are solid benefits that can come with assigning contracts, there are a few drawbacks you should be aware of as well. When you want to assign a contract or wholesale, you’ll have to deal with limitations. Depending on what you are trying to achieve, they might be problematic.
Assigning contracts presents clear drawbacks, such as:
Because you don’t actually own the property, you won’t be able to make any improvements to it.
Again, due to the fact that you aren’t the owner, you won’t have the freedom of offering seller financing. It is not yours to finance...
Because your contract won’t last forever, you’ll have a shorter window of time to get the deal done.
Because most mortgage lenders won’t be willing to deal with assigned contracts, your buyer MUST have the ability to pay all-cash.
Contract prohibitions: You want to make sure the assignment contract you have with the seller does not have prohibitions for future assignments. This can create big issues down the road and is something you want to keep an eye out for. Make sure the contract is drafted by a lawyer that specializes in real estate assignment contract law.
Property-specific prohibitions: HUD properties (property obtained by the Department of Housing and Urban Development), real estate owned or REOs (foreclosed-upon property), and listed properties on the MLS are not open to assignment contracts. REO properties, for example, have a 90-day period before being allowed to be resold.
Also, remember that some states have laws and statutes that essentially make it illegal to market a property you don’t own in your name.
It’s considered to be the “brokering of real estate”.
If you don’t have a real estate license in that state, you could get fined and/or charged with a misdemeanor for doing so.
Even if you are working in a state that the legalities surrounding selling contracts in real estate are more lenient, you HAVE to be abundantly clear that you are actually selling a CONTRACT, not a property.
However, one very clear clause stating it in BOLD, while reading this with the parties involved, can be easily done. With this type of transparency in your approach, it should be clear to any interested parties that you are not the current owner.
You are a middle-man selling a piece of paper that gives you (and ultimately, your end buyer) the right to purchase the property for a certain price.
Now, you decided it’s your preferred method, but what is the right time to assign a contract (AKA wholesale)?
Knowing When to Assign a Contract
When you do have money to buy a property, it doesn’t necessarily mean you should.
Multiple and varied problems can arise with any property – and in some cases, these issues can become significant hurdles to getting it sold.
For many investors, this kind of uncertainty is more than enough reason for them to stick to wholesaling them with an assignment exclusively.
Of course, you can go into a deal with a tactic in mind--knowingly you are about to flip the contract immediately, but sometimes people look to actually BUY the property, and then immediately sell (the double down method we just mentioned).
It is much better for you to simply get it under contract and then assign the purchase agreement rather than buying it outright.
Generally speaking, most properties we deal with and hear about sell within less than 6 months. In the very rare cases they didn’t, and more time was needed to sell, it happened due to at least one of these two reasons:
You’re way off with your so-called evaluation of the property. You missed the true market value, and the profit margins you wrongfully calculated crippled you.
You missed something crucial and fundamental with the property, such as a location that the city was slowly abandoning, land problems, extreme air/water polluted area, etc,.
Of course, neither of the two are a nice surprise when discovered, and as you can imagine, if there’s ever something wrong with a property, it’s better for this problem to stay in the seller’s lap instead of yours.
This is one of the huge benefits of assigning a contract. Much of the risk and headache of actually selling the property, alongside the many uncertainties in the equation you have no control over are gone.
Here is WHEN you should prefer wholesaling (assignment of contract) vs buying and selling (double closing):
If you don’t have the money to invest and buy the property outright
When you’re not very confident about the property’s true market value
The property isn’t local and I don’t want to take on the liability of ownership
When there are potential problems with the property that you can’t get resolved
The seller isn’t willing to lower their asking price to your liking (but it’s still a good deal,
with enough profit margin to be a good deal for someone else
Now that we covered reasoning and timing, let’s look at the actual technicalities of how to assign a contract
The Mechanics of Assigning a Contract
The idea of wholesaling (assigning contracts) sounds way easier on paper than what it actually is. We know numerous people who got their info wrong or simply didn’t bother doing any research.
You know, those small details that come with experience, information like:
What if you can’t find a buyer before the original contract expired?
What kind of Purchase Agreement are you supposed to use?
What kind of Assignment Agreement needed to be signed?
Where could you find the right closing agent to work with?
When would you actually get paid in the process?
What if the buyer went behind your back and talked to the seller?
How are you supposed to get the deal closed?
There’s a lot of information out there, so much that you can get overwhelmed. What is right? What is wrong? How to know between the two?
Some people like to work a certain way, or choose a certain method while trashing other systems that might be beneficial to you and better fit your situation…
Here’s are the basics on how to assign contracts properly:
Stage 1: Contract Signed between Wholesaler and Seller
Find motivated sellers and get deals under contract at ridiculously low prices.
Stage 2: Wholesaler Finds an Outside Investor to Buy Under the Terms of the Original Purchase Agreement
When you start making offers to motivated sellers, your offer needs to be accompanied by a thorough explanation of what you intend to do. Explain:
You’re not planning to buy their property yourself.
You’re planning to sell the contract to someone else and then THEY are going to buy the property from the Seller.
You will communicate with the Seller throughout the process (they won’t ever be left in the dark), so they know what’s happening.
If you aren’t able to find an outside buyer for the property, the contract will expire and the transaction won’t happen.
Stage 3: Wholesaler Assigns the Contract to the Outside Investor and Gets Paid a Deposit
If you find big problems in your due diligence process, either walk away from the deal (if you don’t think I’ll be able to sell it for a profit) or at the very least, be sure to disclose any “Other Issues” that I’m aware of at the bottom of the report.
Stage 4: Seller, Wholesaler, and Outside Investor Close. The Wholesaler is Paid the Balance of the Assignment Fee at Closing
People are people. Meaning, unreliable, so if someone wants you to take their offer seriously, they’re gonna have to agree to it in writing AND put their money where their mouth is.
Before you get your big payday, make sure you get an earnest deposit.
Step 5: Documentation & Getting Paid
Once you have both the Assignment Agreement and the funds required for your deposit, you’ll need to deliver the following documentation to your Closing Agent (i.e. – Title Company or Closing Attorney):
Copy of the fully executed Purchase Agreement
Copy of the fully executed Assignment Agreement
The funds from the end buyer’s earnest deposit
Wholesale Contract Template: The Wholesale Purchase Agreement
In order to make sure that all parties are clear on the specificities of a given contract, the agreement must be as direct and informative as possible.
Luckily, this process can be streamlined with the help of a template.
Use this document as an outline, and not as your final draft contract. Don’t be afraid to add more information as you go along. When it comes to real estate wholesaling contracts, the more informative and clear the better.
Here is a wholesale contract template to get started:
Parties involved: The names of both buyer(s) and seller(s), including signatures from all parties listed on the title.
Description of real estate: The property’s address, legal description, and property type.
Personal property included in the sale price: Anything not attached to the building or the land. In most cases, this will include home fixtures.
Purchase price and financing: The purchase price, deposits, and financing terms.
Where deposits are held: Outlines the manner in which deposits are held.
Financing contingency: Outlines the financial terms or if paying by cash.
Conditions of premises: Highlights the physical condition of the property that will be presented to the buyer.
Inspection contingencies: If the property does not meet the standards of a buyer, as listed from the conditions of premises, this will allow for an inspection period to occur (typically 14 days), in which point the buyer can back out.
Statement regarding lead-based paint: Disclosure related to lead-based paint.
Occupancy, possession, and closing date: Establishes a deadline for the closing date.
Deed type: Confirms the type of deed to be conveyed.
Marketable title: If the seller is unable to pass title or the buyer is unable to obtain title insurance, this option will reject the purchase and return the deposit.
Adjustments: This will vary by state, but typically includes modifications for taxes, water, sewage, and other charges.
Buyer’s default clause: This outlines the rights of the seller if the buyer defaults on the agreed-upon terms of the contract.
Seller’s default clause: This outlines the rights of the buyer if the seller defaults on the agreed upon terms of the contract.
Risk of loss and damage: Protects the buyer in case of damage to the property while under contract.
Addenda: Common disclosures and addenda of the contract.
Contracts are an important part of safeguarding your finances while closing deals, but ultimately, you'll want to have a lawyer reviewing your contracts, regardless of how informed you feel.
The real key to succeeding as a wholesaler is in how many deals you can close CONSISTENTLY, and that's why we've put together a video case study walking you through the exact steps we use to bring in 30-50 wholesaling deals month in and month out.
Click below to watch the case study!