Can someone walk me through the escrow process with wholesaling

Question

I'm a new investor who plans to wholesale in Phoenix AZ (I know I know, its a very competitive market there -- however it's the only place I'm familiar with).

So I've done a lot of research and think I understand the granular process up to the assignment contract. Let's say I find a buyer -- what are the detailed next steps?

From my understanding, I have to get an assignment contract (preferably from a lawyer) and sign that with the buyer. Then I call and find an escrow company/title company, and present to them the purchase agreement and the assignment contract. So do they then set up a meeting in person on the day of closing between me, the seller, and the buyer? Do I just show up at the title company and they hand me a check? How does the buyer pay the title company? Does the title company contact the buyer directly or do I have to tell him all the info?

In addition, how much time do I have to find an escrow company before closing? Let's say the house is set to close tomorrow, can I call an escrow company up today and say I just got an assignment contract, can we have a meeting tomorrow to distribute the funds?

Clarification on all these legal shenanigans and money transfer would be great, thanks everyone!

Melissa McRay Johnson · Answer

Hi @Elan Adler!

I'm going to preface with this: IMPORTANT!!!! Take the time NOW to find an investor friendly title company that is willing to close assignment deals (some title companies won't). You can check with some of the local REIA groups for good title companies and closers. Make sure to let them know ahead of time you're going to be wholesaling and assigning your equitable interest in the deals you bring them. Also ask if there is a cap on assignment fees. Some title companies will close assignments, but have a limit on the fees they will pay out. Also I don't know of a single title company that can close a transaction the same day if you're getting a title policy. It's just not enough time. The fastest I've seen is a week to close and that was years ago. You're going to need probably 3-4 weeks realistically.

I'm in Texas, but this is generally how it should go:

1.You sign a contract with the seller to buy their house. Make sure you put your entity name and/or assigns as the buyer on the contract.

2.Go ahead at that point and receipt that contract with the title company immediately. You want to get this process started right away because many times there will be title issues that will need to be cleared up that could take time. Ordering payoffs and HOA docs also require time to process. Sellers aren't always aware of liens or back taxes owed. They don't always know their loan balance. You want to get ahead of any problems and be proactive in getting those issues cleared up prior to closing. You don't want any surprises at the closing table that could cause your seller or end buyer to walk at the last minute.

3. Market the property within 24 hours of getting it under contract. We put a two week funding approval clause in our contracts that allows some time to market the deal, as well as give us time to renegotiate if there's a lien or title problem that was not disclosed to us from the seller. *Note: we believe in being transparent when we are planning to assign a contract and always make sure the seller understands what we are doing, but not all investors do this. Decide which type of person you want to be :)

4. Once you have an end buyer, you'll do an "assignment of contract" contract which goes to the title company as well. It shows the original seller and the new end buyer with the sales price your end buyer is paying. The buyer will wire earnest money to the title company (whatever was negotiated on the contract). Prior to closing the buyer will wire the purchase funds to the title company to be held in escrow. You are collecting the difference between the original contract sales price and the end buyer's contract sales price as your assignment fee, but ONLY after the deal is closed.

5. I would highly recommend keeping up with all steps of the transaction as it moves forward so you know if there are any delays or problems. I would suggest not just dumping it all on the title company and expecting them to handle everything with no communication from you. They get buried with files and if you're not staying on top of things it can cause delays. Plus you want to maintain a good relationship with the seller and end buyer in case things fall apart on either end. The title company will let you know when title is clear and you're ready to close.

6. Once closing is complete, the title company will disperse the funds and you will receive your assignment fee. It should appear as a line item on the HUD. Then you can decide if you want it in check form or have it wired to your account.

I hope this was helpful!

Melissa McRay Johnson · Answer

Sure!

So again, a week MINIMUM to close. This is why I suggest starting to find a buyer within the first 24 hours. Time is critical here. I usually schedule my closings 30 days out. You can always close sooner if everything comes back clean on the title and all parties are ready to close. If you wait until 3 days before closing the end buyer may not have enough time to get funds in place, especially if they are working with hard money or getting a traditional bank loan. But yes, if you are getting close to closing and the end buyer isn't ready or you haven't found a buyer, I would talk to the seller and get an extension with them. I've found that if we don't have any action on a property we are marketing within the first 48 hours then it's probably overpriced. If you do need to extend have a timeframe to give the seller so you're communicating clearly. This is really important when dealing with a seller who lives in the home. They would have made plans to move out, may need the funds to close on their new house, etc. that could be a huge problem for them if closing is delayed.

Any liens or taxes owed have to be released in order for the title company to issue clear title. Typically liens and taxes are paid out of the proceeds of the sale at closing. So for example if you have a house under contract for 50k and they don't owe anything on their mortgage but have an outstanding lien of 15k, the 15k lien amount gets deducted from the 50k at the closing table. The title company then disperses the funds to the vendor to clear out the lien and a release is filed. If a seller refuses to pay any outstanding liens it could adjust your offer, which could affect the sales price to the end buyer as well. People almost always want to buy a property with clear title and liens cloud the title, making it unsellable normally. Again, this is why I really urge you to get the original contract to the title company ASAP so that you can be aware of anything like that and work it out before it becomes a problem. We always let the seller know that the amount they are getting at closing is the sales price MINUS any liens, taxes, etc. that is owed.

As far as meeting in person, it really depends on you and the title company you are working with. Since you're doing assignments you do wouldn't have to sign anything. I usually send someone on my team for the purpose of getting a testimonial and we give them a "thank you" gift. Creating a good relationship with the seller leads to referrals down the road. For many years I went to closings until I realized it was a waste of time for me. Now if I'm actually closing (like for my flips) I do everything remotely and I have a notary that works in my office to notarize the docs. When you have a good relationship with your title company they are more accommodating. I also think that right now a lot of title companies are doing remote closings anyway depending on where you're at in the country.

Hassan Ghamlouche · Answer

Hey, i'm also new to wholesaling and was wondering if you could send me your purchase & sale agreement!

Elan Adler · Answer

Hey Melissa, Thanks for this long, detailed response -- it's fantastic. I do have a few more follow up questions on some of your points.

1) You mention that it will take about a week for escrow to close, so does that mean at minimum I would have to find a buyer a week before closing? What happens if I find a buyer 3 days before closing? Do I have to get an extension from the seller?

2) If there are liens on the property and the seller is not willing to negotiate, does that mean that either I or the buyer have to eat the cost?

3) Do you have to meet in person with the buyer, seller, and escrow company on the day of closing? Is that done all remotely?

Can someone walk me through the escrow process with wholesaling

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