Wholesale contracts explained to a newb

Wholesaling
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Wholesale contracts explained to a newb

Dimas Garcia
Real Estate Investor · Jacksonville, FL · Member since 2011 · 16 posts · 2 votes

I'm reaching out for help from the BP family because I have what's commonly referred to as 'analysis paralysis', a particularly debilitating case. I can't get started because while I have the general knowledge and theory down, I'm not comfortable with the details of the actual contracts and I wouldn't want to meet with a seller and 'hem' and 'haw' my way through a pitch.

My question has to do with two ways of getting a home under contract to wholesale. One of the things that has me confused is the seemingly interchangeable terms that are used for an option to purchase, purchase options, purchase and sale agreement, etc. I've read many times about this so-called 'one page' option to purchase, but I can't find a template or copy of it anywhere. Just so that I can make sure that I understand it correctly, this is a one or two page agreement between myself and the seller that states I have an agreed upon amount of time to control the property in order to sell this option to a cash real estate investor, yes? Also, here is where I'd state something to the effect of there being a $100 (or any other sum) good faith deposit. Is this correct? Also, how do I go about conducting this transaction with an investor? With an assignment, you would use a title company and perform a double closing, but I'm not sure about the option.

The assignment of contract is just that. An actual purchase contract that is used in everyday real estate transactions with the added clause of allowing the contract to be assigned and adding the 'and/or assign' to the buyer signature block, yes?

I've done a lot of researching here, and everything I've read is extremely valuable, but it's difficult to convince myself that I've totally grasped the situation without getting any feedback. Thanks for your help everyone!

Dimas

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Will BarnardPro Member
Moderator
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
15y

Dimas, I think you will find that sellers will be most comfortable with a PSA (purchase and sales agreement) as an option contract is just that, an option in which you may not excersize, leaving the seller hanging.
Plus, the PSA is simple to explain and go over with your seller. I recommend you use the statndard state PSA. Using it will allow you to inform the seller that teh contract you are using is the state approved one used by all RE agents. This should make them feel comfortable (that warm and fuzzy is a good thing). With any PSA, in the section where you fill in the buyer, simply write your name (or that of your entity) and add "and/or assigns. That simple. Now you have an assignable contract. Just to be even more clear, under the special provisions section, you should also write in that "This contract is assignable"

If asked why you are adding this in, simply explain to your seller that you do many RE transactions each year and your accountant has advised that you never have too many properties in one entity at one time. As such, in the event that occurs, you can "assign" the contract to your other or new entity. You may also add that in a circumstance where you get too many deals all at once, it will allow you to bring in one of your other "investor partners" to the deal because "I always perform for my sellers no matter what".

Hope that helps.

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  • Antoine Stanley
    Investor · Fayetteville, NC · Member since 2011 · 32 posts · 9 votes
    15y

    The option contract is used to get the property under contract for the amount you and the seller agreed on and the timeframe of the option. You can then record that option at the register of deeds,so no one can steal the deal as you promote it. Talking to investors you can tell them about your deal and let them know you have it under contract and you can be upfront about how much your charging to assign the deal. Investors are okay with you making some money just try not to be to greedy I would say. I know with one of my investors I can tell him what I want and he will go to his closing attorney and tell them to pay me x amount in consulting fees on the hud. Just remember to much information is not good, you have to get out there and start talking to investors and sellers and when a deal come go through it so you can learn what works and what does not in your area. Find other wholesalers or join your local Reia. Hope this helps good luck.

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  • Dimas Garcia
    OP
    Real Estate Investor · Jacksonville, FL · Member since 2011 · 16 posts · 2 votes
    15y

    Antoine, thanks for the quick reply! Do you use the option contract exclusively or do you also use a sale and purchase contract with a double closing? Also, can I get a sample of your option contract? Thanks!

    0Reply
  • James Martin
    Property Management · Memphis, TN · Member since 2009 · 668 posts · 362 votes
    15y

    Anytime my assignment fee is over $5,000, I do a double closing. Some cash buyers get upset when you make over that medium. With a double closing, I use my personal sale and purchase contract, I also explain to my closing attorney on how to distribute the funds.

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  • Dimas Garcia
    OP
    Real Estate Investor · Jacksonville, FL · Member since 2011 · 16 posts · 2 votes
    15y

    Interesting point, James. So did you take a regular purchase and sale contract and just cut parts out and added others in? Also, do you find that your sellers are less willing to sign a sale and purchase contract over an option contract? Thanks again

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    15y

    Dimas, I think you will find that sellers will be most comfortable with a PSA (purchase and sales agreement) as an option contract is just that, an option in which you may not excersize, leaving the seller hanging.
    Plus, the PSA is simple to explain and go over with your seller. I recommend you use the statndard state PSA. Using it will allow you to inform the seller that teh contract you are using is the state approved one used by all RE agents. This should make them feel comfortable (that warm and fuzzy is a good thing). With any PSA, in the section where you fill in the buyer, simply write your name (or that of your entity) and add "and/or assigns. That simple. Now you have an assignable contract. Just to be even more clear, under the special provisions section, you should also write in that "This contract is assignable"

    If asked why you are adding this in, simply explain to your seller that you do many RE transactions each year and your accountant has advised that you never have too many properties in one entity at one time. As such, in the event that occurs, you can "assign" the contract to your other or new entity. You may also add that in a circumstance where you get too many deals all at once, it will allow you to bring in one of your other "investor partners" to the deal because "I always perform for my sellers no matter what".

    Hope that helps.

    Podcast Guest on Show #130
    2Reply
  • Jeff NA
    Involved In Real Estate · Portland, OR · Member since 2008 · 117 posts · 44 votes
    15y

    Dimas,

    I found a book that was a huge help in putting a contract together. I borrowed it from my library. It comes with a cd that contains about 20-30 contracts and addendums and clauses that you can copy to your computer. The book explains each section of the contract and allows you to include what you want and exclude what you do not.

    A link to my library's copy of the book: http://catalog.multcolib.org/search~S1?/Yreal+estate+contracts&searchscope=1&SORT=R/Yreal+estate+contracts&searchscope=1&SORT=R&SUBKEY=real%20estate%20contracts/1%2C18%2C18%2CB/frameset&FF=Yreal+estate+contracts&searchscope=1&SORT=R&2%2C2%2C

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  • Dimas Garcia
    OP
    Real Estate Investor · Jacksonville, FL · Member since 2011 · 16 posts · 2 votes
    15y

    Will Barnard,

    Thanks for the succinct reply! I think that's the route I will go as it seems to make the most sense.

    Jeff Z, thanks for the link, I'll check it out!

    0Reply
  • Jerry PuckettPro Member
    Wholesaler · Fort Worth, TX · Member since 2010 · 1k+ posts · 1k+ votes
    15y

    Dimas,
    Will nailed it as usual. I have two different contracts that I use. One is the standard contract for the State of Texas. Most everyone likes this as it is the one everyone is used to seeing. It is however a little daunting to some sellers with it's eight pages and multiple check boxes.

    My other contract is only one page long, and only covers the basics. I use this one for both those who are intimidated by the standard contract, and for experienced investors who want simplicity and speed.

    Get your state's standard contract (look on line or just ask a Realtor)and do what you need to to save it as a Word document you can edit. As for the Assignment, it's just a simple paragraph or two, here, I just uploaded the one I use:http://www.biggerpockets.com/files/user/ejpuck/file/Assignment-Form-1-docx

    Hope that helps.

    0Reply
  • Dimas Garcia
    OP
    Real Estate Investor · Jacksonville, FL · Member since 2011 · 16 posts · 2 votes
    15y

    Jerry Puckett,

    Wow! That's awesome, I really do appreciate it! So after I've gotten the sale and purchase agreement with the seller, then I use this form (or something like it for my state) to assign the sale and purchase contract to my investor buyer? If that's the case, then it sounds like the contracts and the assignments are the easy part. The hard part being the actual business and running around of wholesaling!

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  • Jerry PuckettPro Member
    Wholesaler · Fort Worth, TX · Member since 2010 · 1k+ posts · 1k+ votes
    15y

    Yes,in my opinion, the contracts are the easy part. It's daunting until you've done exactly one, then it's old hat. Negotiate the best deal you can with your seller, spell out the terms in the Purchase and sale contract, then fill out the Assignment form for your buyer to sign, and drop the whole bundle off at the title company.

    The Assignment form I posted is generic and should work in any state. Remember, it is first and foremost closing instructions for your title company. I have been told they could care less if it was written on a napkin.

    But secondly, it is a measure of protection for you, setting out how you will be paid, and preventing your buyer "going around you" as so many seem to fear.

    I believe you will very quickly come to realize that the hardest part of the job is finding the deals that are truly deals. I highly recommend reading Will Barnard's post "The Truth About wholesaling" here: http://www.biggerpockets.com/forums/93/topics/58383-the-truth-about-wholesaling-

    0Reply
  • Dimas Garcia
    OP
    Real Estate Investor · Jacksonville, FL · Member since 2011 · 16 posts · 2 votes
    15y

    Mr. Puckett,

    I have most assuredly read that post already and have taken it to heart. I do not want to label my company as amateur or faulty in any way because I haven't run the numbers correctly or performed my own due diligence in order to get my end client a great deal. I've been doing the work of a wholesaler for a few months now as a rehabber looking for deals. While I've found some great deals, the one private investor that we've been able to acquire hasn't been happy with them. He's only approved one deal and the bank did not accept our offer three times. So, we realized that hey, maybe we should try and get these props under contract and send them off to other investors who have the cash to get them done and make some cash ourselves in the process.

    Also, you just blew my mind. I thought that if one were to use a full purchase and sale contract that the only way to close is through a double-closing. I think I truly grasp the assignment of the contract now. Basically, get the seller to sign the amended sale contract, assign it to buyer, send to title company. No need for transactional funding. I know this stuff may sound so elementary to you veterans that I sound like a fool, but I'm one of those people that really needs to look at something at all angles before I attack. I don't like surprises when I could have prevented them by being prepared.

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  • Jerry PuckettPro Member
    Wholesaler · Fort Worth, TX · Member since 2010 · 1k+ posts · 1k+ votes
    15y
    Originally posted by Dimas Garcia:
    No need for transactional funding. I know this stuff may sound so elementary to you veterans that I sound like a fool, but I'm one of those people that really needs to look at something at all angles before I attack

    We all began someplace...and that is one of the major benefits of BP.

    Now wholesaling REO property is a whole other story. You cannot assign contracts with the banks, they wont permit it. The scenario I gave above is for dealing with private sellers. But when dealing with the banks, you will need to double close, and therefore will need either transactional funding or otherwise have means to double close. This is not my area of expertise, but there are plenty of good resources around the site for this strategy.

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  • James Martin
    Property Management · Memphis, TN · Member since 2009 · 668 posts · 362 votes
    15y

    Jerry is right about having transaction funding, or private money. I also recommend that you get familiar with your title company and their procedures. They can also instruct you on how to structure your deals. You can find a good title company at your local REI Club that will be familiar with creative transactions. I always send my closing attorney instructions on how each deal is to be funded and distribute. What I'm trying to say is I use about three differ attorneys depending on how I need the deal to work. One attorney will allow me to close with the buyer first, and use his funds to go to closing with the seller next, but only with cash deals. The other attorney, case by case will lend me a small loan (Very high interest for same day closings) to do certain deals. I was in the dark about certain things until I built a relationship with them, and in return they offered me great advice.

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