NEED HELP understanding the wholesale process

[Edward Payne]

Hello… I’m a new real estate investor and have spent a good share of time getting investor education. Like many new investors I’m starting out with wholesaling. Through my education journey I’ve learned of a few different methods or processes for wholesaling. I’m seeking help to streamline all the information I’ve gathered into a process that will work for me. I’m a somewhat confused and hope you will help. Obviously, insights from other wholesalers that are out there doing deals now is GREATLY appreciated.

Here’s my take on the wholesaling process;

• FIND A DEAL – that is a property I can place under contract for no more than 70% of ARV. How does my assignment fee factor into this? Should I be backing out my assignment fee from the MAO or does the buyer account for the fee from their 30%? I'm currently using direct marketing and driving for dollars to churn up leads.
• After finding a deal, I initiate a contract and be sure add “and or assigned" after my company's name (I'm using an LLC to protect personal assets against lawsuits). I was told to never give the property owner any money. Also, I can set the terms on how much earnest money will be put down and how long the home will be under contract.

• •THIS IS WHERE THINGS GET CLOUDY FOR ME. I’ve studied three different approaches and not sure which is the best/correct way to go.
• 1.Go to a title company, pay earnest money, close on property, then seek to wholesale it.
• 2.Go to a title company, pay earnest money, then find buyer (agree on property price and/or assignment fee), have buyer pay you an initial fee that will cover the earnest money I put down, assign the contract to the buyer, then send an invoice to the title company for the agreed upon amount of the assignment fee, get paid at closing.

• 3.Don’t go to a title company but find a buyer FAST (or have one lined up before finding a deal), assign the contract to the buyer, have the buyer handle the title company & earnest money, send an invoice to the title company for the agreed upon amount of the assignment fee, get paid at closing.

• Some advice I received from a title company: don’t make the assignment fee more than 6% of purchase price unless you have a really good reason asking for more (need clarity on this one). Their take on the process: 1) find deal, 2) Inspect property, 3) my company pays earnest money, 4) find assignee, 5) may get “assign money” when contract transferred, 6) Get paid at closing

Most of my training and personal study has explained the wholesaling process in broad steps. I’m really looking for some DETAILS in order to avoid blowing deals and learning the hard way.

[Jeff Rappaport]

@Edward Payne, Wow!  I am amazed at some advice that other investors give on this forum.  I firmly disagree with @Chris Grenier on his advice to you.  Here is what I actually do in two states:

First, find out what buyers are paying for rehabs. In utah and Idaho I find that rehabbers will pay about 80% of ARV minus repairs. The formula of ARV x .70 minus repairs = MAO (Maximum allowable offer) still applies but needs to be tweaked depending on the market. Most markets are hot right now and rehabbers will pay more. You also will be able to offer more to the sellers so you will have a better chance of getting more offers accepted.

Now that offer does not include your fee. So you should be offering less than the MAO. The minimum fee I try to get on every deal is $10K.

I am not a fan of writing your name or entity as the buyer and adding "and or assigns" to it.  I use a REPC that makes it clear that the contract is assignable.  I also create an addendum which includes again that the contract is assignable.  I have a few disclosures that I include in every agreement stating I am a "for profit" company and I will either buy and fix this property, buy and hold it or sell it quickly for a profit.  Not once have I ever been told "no" because I had an assignment of contract clause in my REPC.  

As far as earnest money goes, it is up to you and the seller to agree what that should be.  If you don't have the money for a significant earnest money deposit just put in the agreement that the deposit will be made with the Title Company within 7 business days.  If you find a buyer by then have them deposit the earnest money with the Title Company.  Always make sure to collect significantly more from your buyer than what you have agreed to give to the seller. 

Once I have a purchase agreement on the property I go and order a title check.  You can wait on this step until you find a buyer but I get it done right away.  That way I know if there are any issues on title I need to deal with.  

Once I find a buyer I send them an Assignment of Contract document.  It states what I am charging for this Assignment (if it is a fairly significant fee you may want to consider doing a double close).  They sign the Assignment and deposit a non-refundable earnest money deposit with the Title Company.  I send the buyer the original contract and set them up to work with the Title Company.  I send the Assignment and the original Purchase Agreement to Title with the names and phone numbers of both my Buyer and Seller.  

I let the Title Company know I want the closings to be separate and that I do not want the seller to see the Buyer's side of the HUD1.  I don't want the seller to know what I made on this deal.  Send your wiring instructions or set up a time to pick up your check after the deal has funded and recorded.  I suggest you don't even go to closing!  

Don't get me wrong, you have to manage this whole process.  You need to know the Title Company knows what they are doing.  You need to instruct the buyer and seller to do what they need to do or else nothing ever gets done.  

Hope that helps!