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What Is a Wholesaling Contract?
In real estate, a wholesaling contract is an investment strategy that allows someone to act as a middle person between a seller and an end buyer.
This real estate contract between an investor and home seller allows them to purchase rights to the home with the hope of selling these rights for a higher price to the ultimate end buyer.
The difference between the wholesale purchase price and the end buyer’s purchase price is the investor’s total profit.
Some wholesalers will purchase a mortgage note from a buyer who wishes to acquire a large cash upfront. The wholesaler then sells the mortgage note and receives a transaction fee.
Here is an article that provides a detailed overview of wholesaling real estate.
What’s Included in a Wholesaling Contract
The wholesaling or sales contract is a legally binding document that gives the investor rights to purchase a property from its seller.
This is not the same as purchasing the property directly. It does not provide the wholesaler ownership of the property.
The role of a wholesale real estate purchase agreement is to grant an investor opportunity to find a higher-paying buyer. In some cases, the investor may even use this agreement to find buyers before they have a property to offer.
In a wholesaling contract, the seller gives the buyer permission to transfer the right to buy their property to another buyer for a higher cost.
Many wholesaling contract templates around the internet can show you what the document should include. At a minimum, your document would need:
- The legal names of the buyer (investor) and seller.
- The price of purchase.
- The good faith or earnest money deposit amount.
- A description of the property.
- Signatures from both parties.
Here is an article that offers a basic description of a wholesaling purchase agreement and its key elements.
Who Uses a Wholesaling Contract?
A wholesaling contract is used between an investor and buyer and an investor and the end buyer.
The end buyer is the person who purchases the right to buy a property from the wholesaler. This is the person who ultimately closes the sale of the property with its original seller and becomes the new owner.
While the wholesaler themselves doesn’t have the title to the property, they do hold the rights to the title. They use their assigned real estate purchase and sale agreement to negotiate a price with their buyers.
It is important to note that every state has its laws and restrictions regarding wholesaling and assignment of contract. Therefore, you should carefully review these regulations and consult with a local real estate lawyer if you have any questions.
Wholesalers often look for distressed property that needs repairs and renovations. However, unlike someone who buys, renovates, and sells a house after it’s been flipped, the wholesaler looks for a buyer eager to close on a good deal.
The buyer can acquire a property that needs repairs for a reasonable price, which they then use to either flip and resell, rent out, or reside in.
Here is an article that offers an overview of wholesaling real estate.
Image via Pexels by Devon Rockola
How to Write a Wholesale Real Estate Contract
The easiest way to write a wholesale real estate contract is to look for purchase agreement contract templates online. These offer a solid foundation for you to modify to suit your needs.
You can also consult with a real estate lawyer, who can draft a real estate contract for wholesaling properties. You can use this contract in the future to approach buyers you are interested in purchasing a property from, editing it as needed to suit the circumstances.
If you decide to write a wholesaling contract on your own, you will need first to research the wholesaling real estate laws in your state. Failure to do so could result in legal penalties.
Once you know what you can and cannot do in your wholesaling process, you can draft your contract. It should include the following:
- Your legal name.
- The legal name of the seller.
- The address and a description of the property.
- The agreed-upon purchase price for the rights to the property.
- Any good faith or earnest money deposits you paid.
- Deposits, holding locations, and financing terms.
- A contingency contract with details about inspection, financing, and other contingencies.
The contract should also contain information about the deed type and a marketable title. A marketable title allows the buyer to get their deposit back and waive their purchase rights if the seller cannot pass the title or the buyer cannot obtain insurance.
There should also be a buyer’s and seller’s default clause that outlines how parties shall proceed if the buyer or seller defaults on their agreed terms.
Here is an article that discusses contingencies and defaulting in real estate.
Can I Get Out of a Wholesaling Contract?
Contingencies allow a buyer to get out of a wholesaling contract without facing any penalties.
Certain contingencies can help protect buyers from properties that would not ultimately become profitable to them. Below are three common contingencies in real estate that can be helpful to include in a wholesaling contract.
Contingency 1. Home Inspections
As it is not uncommon for a wholesaler to sell a distressed property to a flipper, home inspections are an important precaution. Though some damages may be expected in some instances, underlying issues may make the house dangerous or too difficult to sell.
There should be a specified period of due diligence for the investor to conduct an inspection or have a professional inspector evaluate the property within 14 days of signing the purchase of rights.
During the inspection, there may be specific issues that allow the buyer to back out of the agreement, such as mold, foundational damage, roof damages, pests and termites, lead-based paint, radon, structural damages, and so on.
Expressing this contingency in full detail, and arranging an inspection as soon as possible, is the best way to protect yourself.
Contingency 2. Home Insurance
It is not uncommon for a seller to require a buyer to purchase their home insurance before acquiring the title's rights.
Having homeowner’s insurance protects the buyer’s investment in the event of natural disasters, fire, flooding, etc. However, it can be difficult to attain insurance for a wholesale property.
The buyer may add a contingency to the contract that allows them to back out of the agreement if they cannot secure proper insurance before closing a sale.
Contingency 3. Right to Assign
The right to assign contingency is standard in any wholesale real estate purchase agreement. This entitles the buyer to back out of their agreement if they cannot secure and transfer rights to a new buyer in a set timeframe.
This contingency offers protection to the buyer and security to the seller. For example, suppose the buyer cannot come through on their bargain end. In that case, the seller can resume looking for a buyer in the traditional housing market.
Where Do I Get a Wholesaling Contract?
The best place to get a wholesaling contract is through a real estate attorney in your state. Because real estate investment and wholesale laws differ throughout the U.S., a lawyer is the best resource for the most accurate, up-to-date information.
You can also look online for wholesaling contract templates, which you can modify and send to a lawyer to review.
Consulting with a professional real estate attorney facilitates the wholesale process tenfold, ensuring you can move forward with complete confidence in the legality of your contract.
Here is an article that explores reasons to work with a lawyer in wholesaling.
Who Buys the Wholesaling Contract?
The wholesaling contract is purchased by the investor who wishes to purchase rights to a title from a seller.
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