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Wholesaling real estate creates steady income for investors who can identify properties being sold for under market value, initiate an agreement with the seller of the property, and finally assign the purchase contract to another buyer.
A wholesale real estate contract between the seller and the wholesaler is required in this transaction. The wholesaler promises to sell the property for a specified minimum price within a specific timeframe. For example, a typical contract may state a wholesaler agrees to sell a property for $200,000 within 3 months.
After finalizing the contract, the wholesaler seeks a buyer. The wholesaler’s objective is to sell the property for a higher price than the contract stipulates. If a contract sets a property’s selling price at $200,000, the wholesaler should attempt to sell it for $225,000 instead. The “spread,” or the difference between the contract price and the selling price, is $25,000 which is profited by the wholesaler once the deal is closed.
There are two main methods used for closing a deal: the assignment of a contract discussed above and the double closing (also known as a double escrow). Let’s take a closer look at the two ways to close a wholesale deal.
Assigning The Contract
Assigning a contract is arguably the easiest way to wholesale real estate. As the name suggests, assigning a contract means that the wholesaler sells the contract, not the property itself. While they don’t own the property, they control it using the contract. Subsequently, once the wholesaler assigns the contract for a subject property, an end buyer will assume the role of the buyer.
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).
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 to purchase the home and sell the rights to the end buyer for a profit. When it comes time for the buyer to purchase the property, make sure they send the deposit to the title agent or attorney handling the closing. Once the transaction is completed, you are awarded a “finders fee” for acting as the “middleman.” Of course, this is contingent on the premise that every requirement is met in the purchase and sale agreement.
The Double Close
In some cases, a wholesaler may elect to conduct a double escrow, such as when the seller does not agree to an assignment of the contract clause or when it is not allowed by local regulations. 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 true 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, wholesalers should make sure that their lender allows this type of transaction.
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