Don’t be a good-for-nothing wholesaler
Boy I’m going to get some hate mail for that title. But read on and you will understand what I mean by it.
Before we get started, I need to define what I mean by the term “wholesaler.” Wholesaling is a strategy in real estate where the basic idea is to get a house under contract for enough of a discount that you can mark it up some and still be able to sell it to an investor who is looking for a deal. This means the better you are at negotiating, the more money you can make.
Wholesalers typically employ one of two methods. The first, and cleanest way, is they find a distressed seller, negotiate a price and put the house under contract. While they are waiting to close, they line up an investor to buy the house who plans to rehab it or turn it into a rental. On the day of closing, the wholesaler buys the house from the seller for the agreed upon price and then sells it to the investor the same day. They call this a double close or an A-to-B, B-to-C closing. And the spread between the purchase and sale prices is the wholesaler’s profit.
The second way wholesalers work is similar. But instead of actually purchasing the house, they use something called an assignment of contract to do the deal. In this case, the wholesaler has no intent to buy the house. Instead, their plan is to get the house under contract from the seller and then assign that contract for a fee to an investor who will actually buy the property.
In other words, they aren’t buying and selling a house. They are just selling their interest in the contracts they create.
This is a win-win situation in both cases. The sellers gets rid of their house, the investor gets a house to work on and the wholesaler makes a profit for all the effort.
In this way wholesalers fill a need for both the seller and investor. The wholesaler uses their marketing skills to find sellers who need to sell and then provide investors with a steady stream of deals to buy. And because of this, wholesaling has become a niche that people have built entire businesses out of.
But there is a right way and a wrong way to be a wholesaler.
Like I said earlier, the best and cleanest way to wholesale a property is where you purchase the property and resell it. There is no gray area there. You cannot be accused of brokering a deal (which requires licensing in most states), and you cannot be accused of fraud representing yourself as a buyer when you have no intent of purchasing the house.
Those two issues have come into play when doing the assignment method incorrectly and people have faced lawsuits and other legal actions because of it. But the long and the short of it is if you are honest with people by letting them know that you are planning on assigning the contract to one of your investors, you should have no issues.
So you can make some good money in real estate being an honest wholesaler without the need to get a mortgage or a private loan to buy a house. And for people who do not want to endure the joys of rehabbing and landlording, this strategy can be awesome. Just don’t turn into a good-for-nothing wholesaler like the one I have been dealing with this week. Let me tell you what I mean by that.
I was contacted by a seller who I’ve done a deal with before. She sold me her previous house and was now downsizing since the kids had moved out. She did one of those Google searches for selling her house quickly and found a company that was willing to give her a fast offer, site unseen. She thought it was fair and signed the contract.
The reason why she was calling me was that they were a week out from the close date set in the contract and the “company” was ghosting her. She had not been contacted by an attorney to set up the closing, the payoff for her mortgage had not been requested and she suspected that the deal had fallen through.
I went out to meet with her to look at the house and see how I could help. During our conversation I learned that she was waiting for the proceeds from the sale to secure the rental she was moving into and she was worried that if the deal didn’t go through she would lose her rental.
I asked to see the contract, and she brought it out. Y’all it was terrible. It was a two page document that was poorly worded and missing many things that you see in a normal purchase and sale agreement.
One of the things I noticed was that the agreement had no right of extension built into it. With that in mind, we wrote up a back-up offer that mentioned this contract and said that if it fails to close for any reason by the contract date, our contract would take control.
Well, the wholesaler didn’t close. They never intended to. They just tied this lady’s house up looking to make a buck without thinking of the ramification it could have on her should they not do what they promised.
We don’t run that kind of business. If we say we are going to do something, we do it. And our contract said we could close on time and make sure she had the money to move. And that is what we did.
When you create a contract, you are making a set of promises. Be the kind of real estate investor who does what they say they are going to, especially if you are using the assignment of contract method, because if you are a good-for-nothing wholesaler, you won’t last long in this industry.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.