Clarifying the wholesale transaction

[Timothy Franklin]

Hey all,

I would like someone who is experienced in wholesaling to verify the accuracy of my understanding of the wholesale transaction. I understand the process as follows:

Step A: wholesaler places property under contract. (A-B)

Step B: wholesaler places buyer under contract (B-C)

Step C: Closing
Wholesaler (or PML) wires title company (not the buyer here) The funds for Step A contract). Buyer wires funds for Step B to title company). Title company processes transaction and finalizes sale. Title company issues check to seller. Remaining money (less title fees) in escrow is returned to wholesaler (less PML funds and fee if used) with the remaining from the Step B contract.

The reason being is that it is illegal to sell a property you do not own. From my understanding you cannot place a wholesale contract and have no funds to complete the transaction using only the buyers capital.

is this accurate from your experience or is there anything missing? Thanks in advance.

[Jacob St. Martin]

Hello Timothy, 

What you are describing us actually more similar to a double close. Here you are technically buying the property then immediately selling it to the end buyer. Some wholesalers utilize this strategy because the buyer does not see your wholesale fee. 

The Standard wholesale process is that you get the property under contract and that contract states that you have the right to assign it. Then your buyer signs and assignment contract which states that they are taking over the contract. You get paid by the assignment fee which is a fee shown on that contract. 

There are a few things to note here:

1. I am not a lawyer so anything I say here is not legal advice and your contracts should be reviewed by an attorney.

2. In the assignment of a contract, if your assignee (buyer) does not follow through with the contract you are still contractually obligated to do so unless you are able to break the contract by other terms set out. 

3. In none of these scenarios are you selling a property that you do not own, you are either selling a property you own (double close), or assigning a contract to collect a fee. However, the lines get really blurry. Some states have outlawed wholesaling because it straddles the line, some states have rules about how you can and can't market wholesale deals, so be careful here. The reason for this is that without a license you have no fiduciary responsibility to your clients. Because of this I have seen lots of wholesalers really rip people off by not doing what is in their best interest (not all are bad though). 

I think it is wise to consider how to ethically wholesale. In my personal opinion the seller should be aware of the market value of there home both before and after renovations and choose to sell to a wholesaler based on the convenience, timeline, inability to sell the house on the market, etc. 

Feel free to reach out if you have any questions!

[Timothy Franklin]

Thanks Jacob. Could you detail the process for a traditional wholesale and any monetary requirements as you understand it? We are looking to wholesale outside of our chosen market to help build capital for projects within our chosen market (Louisiana) as I have potential deals in other markets and am not confident in how to proceed with them contractually, (don't want to be stuck with a bill I can't handle currently and also want to ensure I'm operating correctly). As far as ethically that is part of my nature and I don't care for the aggressive (potentially predatory) strategies discussed by others, but I see value in offering a transparent and convenient service with lower costs and faster turnarounds than traditional MLS transactions.

Our business plan actually includes rehabbing distressed properties and conducting off-market transactions with owners currently occupying distressed properties using equity to reduce the out of pocket costs for the seller/buyer and to simplify the process. The market we are in currently is ideal for such but we need the initial capital and assets (rehabbed) to begin execution on the model.

[Michael Diossa]

Your understanding is generally correct, but it's important to distinguish between assignment (where the wholesaler doesn't own the property) and double closing (where the wholesaler temporarily takes ownership of the property). In either case, the wholesaler usually doesn't need to provide their own funds to complete the deal unless they are doing a double closing and need private financing for that purpose.

The title company plays a key role in ensuring that the funds are processed correctly and that the transaction is legally and financially finalized, including disbursing funds to the seller and paying any fees owed to the wholesaler, private lender, or other parties involved.

1. Contract with Seller: The wholesaler secures a property under contract, usually with a small earnest money deposit.
2. Find Buyer: The wholesaler finds a buyer (investor) and assigns the contract, earning an assignment fee (difference in price).
3. Closing: The buyer wires funds, the wholesaler receives the assignment fee, and the title company handles the transaction.

Costs:

• Earnest Money: Small deposit.
• Marketing: Costs to find deals.
• Funding (if needed): For double closings.
• Profit: The wholesaler earns the assignment fee.

prioritize transparency and value. In new markets, network, use a trusted title company, and consult an attorney for legal guidance.

[Jacob St. Martin]

Quote from @Timothy Franklin:

Thanks Jacob. Could you detail the process for a traditional wholesale and any monetary requirements as you understand it? We are looking to wholesale outside of our chosen market to help build capital for projects within our chosen market (Louisiana) as I have potential deals in other markets and am not confident in how to proceed with them contractually, (don't want to be stuck with a bill I can't handle currently and also want to ensure I'm operating correctly). As far as ethically that is part of my nature and I don't care for the aggressive (potentially predatory) strategies discussed by others, but I see value in offering a transparent and convenient service with lower costs and faster turnarounds than traditional MLS transactions.

Our business plan actually includes rehabbing distressed properties and conducting off-market transactions with owners currently occupying distressed properties using equity to reduce the out of pocket costs for the seller/buyer and to simplify the process. The market we are in currently is ideal for such but we need the initial capital and assets (rehabbed) to begin execution on the model.

 You pretty much had the outline for the double close above which you do need the purchase amount to do. There are some lenders who specialize in lending for double closes and will basically send you the money for a couple days but I personally haven't done this and don't know what the charge. For the typical wholesale the steps are really just fine a deal through marketing, have them sign a wholesale contract, have an established buyers list and send it to them, get a buyer to sign an assignment of contract agreement, and when you close you get paid out your fee from the title company. You really don't need any up front cash other than having an attorney review your contracts

[Timothy Franklin]

Thanks again Jacob. I have a contract template for a double close, but not for an assignment contract, I will have to source that for each of the locations we have deals. Thanks.

[Don Konipol]

Quote from @Timothy Franklin:

Hey all,

I would like someone who is experienced in wholesaling to verify the accuracy of my understanding of the wholesale transaction. I understand the process as follows:

Step A: wholesaler places property under contract. (A-B)

Step B: wholesaler places buyer under contract (B-C)

Step C: Closing
Wholesaler (or PML) wires title company (not the buyer here) The funds for Step A contract). Buyer wires funds for Step B to title company). Title company processes transaction and finalizes sale. Title company issues check to seller. Remaining money (less title fees) in escrow is returned to wholesaler (less PML funds and fee if used) with the remaining from the Step B contract.

The reason being is that it is illegal to sell a property you do not own. From my understanding you cannot place a wholesale contract and have no funds to complete the transaction using only the buyers capital.

is this accurate from your experience or is there anything missing? Thanks in advance.

The laws regarding real estate transactions are often state specific.  Gray area interpretation up to individual courts which have rendered seemingly contradictory decisions.  It MAY be fraudulent to offer to purchase a property you can’t afford to buy, but that’s a hard one to prove.  The best the state real estate commissions have come up with is (1) licensure needed to “wholesale” legally and (2) full disclosure of intent to the seller. 

The double close or back to back closing is NOT illegal; it’s just darn hard to find a title insurer willing to do it.  So, essentially the money from the ultimate buyer can NOT be used by the intermediate buyer to close on their purchase since that would be using money from a purchase that can not occur until the prior purchase has been completed.  

Interestingly I don’t see any legislation or legal action against REAL wholesaling, which is purchasing a property at a wholesale price and immediately selling it a a retail or higher than wholesale price.  The legal action is against people who have no intention of closing or no ability to close the purchase tying the property up with the seller believing the buyer will close when in reality the transaction will only close IF the “buyer” finds someone to pay more than he is paying.  So you can think of it as wholesaling without the capital or willingness to close is under legal attack (in SOME states), while wholesaling without the capital $ and intent is no problem. 

Btw, this all applies to owner occupied SFR sellers; commercial or investment property falls under general commercial transaction regs

[Timothy Franklin]

Thanks Don, that is both enlightening, and created new questions as I have 2 potential deals that could be classified as commercial, both are airbnb portfolios, with one being 3 singe family units, and the other being a single site with multiple units (11 units,themed resort style). I have been trying to avoid the coaching programs (limited capital) but it seems like I might need one if (and/or)  not a lawyer on retainer to sort  through it all. I would J/V but not sure who I should approach on that. So many questions, and so many opportunities lol.