I could make a very strong case for your first real estate exit strategy to be a wholesale deal. Property wholesaling, for that matter, is one of the most, if not the most, important aspects of residential redevelopment. If for nothing else, it is the best way to set the foundation for the rest of your career.
Understanding the intricacies of each exit strategy, and particularly when to use them, is the quintessential reference point separating new investors from those that are seasoned veterans.
But you might be asking how does the wholesaling business work? What do terms like double escrow mean?
Experienced investors are likely versed in every potential real estate exit strategy, allowing them to maximize profits on every deal. However, initially, newer investors are advised to familiarize themselves with the prospect of wholesaling. As one of the easier real estate exit strategies, a property wholesaling deal can provide substantial earnings potential while simultaneously mitigating risk.
Perhaps even more important than the strategy itself, is knowing when to use it. If rehabbing isn’t in the cards, investors should consider a wholesale deal when the following criteria are met:
- They are CASH poor
- They are relatively new to the industry
- They don’t have a large budget for marketing
- The potential deal does not fit within the parameters of their criteria
- The subject property requires a large renovation (typically more than 10-10% cost to cure)
What are your real estate wholesaling goals?
The Top Real Estate Wholesaling Strategies
Wholesaling real estate, as you may well be aware, witnesses the investor facilitate a transaction between the seller and the end buyer. Essentially, in a wholesale deal, investors act as the “middleman.” In doing so, investors locate discounted properties that meet the criteria of a prospective end buyer. With a deal located, the end buyer has the option of either taking over the investor’s contract or purchasing the property directly. Either way, the investor is transferring ownership of the property to the buyers. This process compliments any type of property, from single-family homes to condos and commercial properties, and in nearly every major market.
The real estate industry currently recognizes two methods in which a wholesale deal may be closed. Investors are awarded the option of selling the contract or preforming a double closing. For those less familiar with these real estate exit strategies, selling a contract is commonly referred to as an “assignment” or “assignment of contract.” Conversely, a double closing may also be referred to as a “simultaneous close” or “double escrow.”
I highly encourage aspiring real estate investors to consider their first exit strategy to be a wholesale deal. The nature of a wholesale deal, for that matter, coincides with less risk and is much easier to complete without a substantial knowledge of the industry. Wholesaling is essentially the entry level exit strategy most investors use to get their feet wet. However, it remains viable throughout your career as an investor. Many real estate entrepreneurs, myself included, have made wholesale deals the backbone of their business, and there is no reason you can’t too.
Let’s take a look at the two most popular ways to wholesale a deal:
Real Estate Wholesaling: Assigning The Contract
As it turns out, assigning a contract is one of the easiest ways to wholesale real estate. Assigning a contract, as the name suggests, requires the investor to sell a contract, not the property itself. In other words, the acquisition of a contract by the investor places equitable interest in their hands. While they don’t own the property, they control it by means of the contract. Subsequently, once the investor receives the contract for a subject property, an end buyer will assume the role of the investor.
According to Joshua Dorkin, in association with BiggerPockets, “A wholesaler lives off of the idea that price overcomes all objections. If you can sell a property for a low enough price it doesn’t matter what’s wrong with it, somebody will buy it. A wholesaler focuses on developing two things. Finding deals and their network of investors to sell to.”
It is important to note that you must sign a contract to purchase a subject property during a wholesale deal, this is known as a purchase and sale agreement. Furthermore, make sure the contract does not prevent you from “assigning” or “selling the contract” to an end buyer. All contracts, by default, can be sold to another party unless specifically stated otherwise within the contract.
For arguments sake, let us assume there is a clause denying you of the rights to assign a contract. There are several Board of Realtor contracts that limit an investor’s ability to do so. Therefore, it is important to familiarize yourself with the agreements Realtors are using in your particular region. If you happen to come across a contract clause that specifically limits your ability to sell it, you may take an alternative course of action. Sometimes the solution is to strike the clause from the agreement altogether and hove both parties initial and date the change.
Make sure that your specific state allows for this change. This does not mean selling a contract is illegal; it is simply limited within the particular agreement.
It is important to understand that the assignment of a contract does not mean you are actually selling the property, nor will your name go on the title. You are simply assigning your rights within the contract. Essentially, you are assigning your right to purchase the property at the agreed-upon terms for a profit. The end buyer is therefore expected to replace you on the contract. When it comes time for the buyer to purchase the property, make sure they send the deposit to the title agent or attorney that is handling the closing. Once the transaction is completed, you are awarded a fee for acting as the “middleman.” Of course, this is all contingent on the premise that every requirement is met in the purchase and sale agreement.
Real Estate Wholesaling: The Double Escrow
Assuming the prospect of assigning a contract is not possible, investors may conduct a double escrow. Otherwise known as a “simultaneous close,” a double closing is an equally profitable real estate wholesaling strategy. Essentially, the process of a double closing will witness the investor purchase the property and resell it at a later date. Depending on the particular scenario, the reselling of the subject property may land on the same day it was purchased or even 60 days later.
During a double close, your company will enter into a chain of title and is therefore considered the owner of the property for a short period of time. Accordingly, the transition of property ownership officially transfers from the seller to you (A-B transaction). It is then up to you to find a buyer who will purchase the property for more than you paid for it (B-C transaction). While the execution of a double closing is not much different from a regular purchase, there are several aspects you must coordinate and be aware of.
Two settlement statements inherently accompany this real estate exit strategy, as you are buying from one party and immediately selling to another. The first statement, referred to as the HUD-1, reflects the numbers you negotiate with the seller. Subsequently, the second statement reflects the numbers you decide to sell the property for to the end buyer. Keep in mind, that on a double escrow, you will incur the standard fees associated with a real estate closing. Those fees are directly correlated to the state in which the transaction is taking place.
Unfortunately, real estate wholesaling strategies like the double escrow are not always an option. Many traditional banks have stipulations that prevent this particular process. Depending on the lender, you may not be able to double close on a property where you are awarded the title of the house the day of the closing and immediately sell it, transferring that title to someone else. Assuming your particular lender prevents this action, your options are to assign the contract or consider a different real estate exit strategy.
During a double escrow, you may not, by any means, use the buyer’s funding to close the initial purchase if they are receiving a loan from the bank. If they are, you will have to fund the purchase. Those without money readily available may seek the assistance of a private money lender.
4 Simple Steps Of Real Estate Wholesaling
The wholesale deal has proven to be one of the best ways to introduce new investors to the real estate landscape. While it may come with slightly lower returns, real estate wholesaling has significantly less risk, and can be accomplished must faster than a traditional rehab, even with a rehabbing checklist to consult. Below you will find the four steps of a traditional real estate wholesale deal for beginners to follow:
Your next property wholesaling deal could be just around the corner from you; when will you seize the opportunity?
