It seems that most people that want to start flipping houses just come into it with the intention of buying, fixing and selling. We tend to focus on the information we are looking for and are not as receptive to things we aren’t looking for. With this being the case, we may not really give much weight to the advice that wholesaling houses is a great way to get into house flipping.
I’ve had quite a few questions from people about the specifics of how wholesaling works. It just occurred to me that I’ve never written a post covering the details of wholesaling houses. We covered pieces of it and tips, but never the general overview. So here we go.
At its core, wholesaling involves selling houses as-is to another buyer. Typically the buyer is another investor that is going to fix up and either rent or resell the house. The best buyers are cash investors as they can move quickly and make the wholesale a piece of cake. Some people sell to owner occupants but that typically requires more work and does not work with some of the methods (which I will be discussing next).
Of course, the order can differ a little. You could close on the house and then find a buyer. In this case, you will have to be able to come up with the money to buy the house first. This could either be your own cash, bank loan, hard money loan, or a loan from a private money lender.
Should you build a buyers list first or after getting a deal?
You could and should also start looking for potential cash buyers before you get a deal. There are two schools of thought on this. Some feel that if you find a good enough deal, finding a buyer will be easy. I agree with that.
However, why not start looking for buyers as you are marketing and getting started? It will take some time before you will find a good wholesale deal (usually). This way you can find the buyers that are the most serious and that you feel you want to build a business relationship with. You see, most investors that are wholesaling houses have a handful of buyers that buy 90-95% of their deals. I feel it is better to start finding this group of VIP buyers as soon as possible.
There are different methods used for wholesaling houses. Which one you choose depends upon the circumstances. Let’s go over them.
With simultaneous and double closings, you don’t use the assignment of contract form as you are not assigning your contract (the agreement you signed to purchase the house from the homeowner seller). Instead, you sign another purchase agreement with your end-buyer with you as the seller. You don’t own the house but do have a vested interest in it and so can sign to sell the house as the new seller (of course, if your closing with the original seller doesn’t happen, you won’t be able to close the second transaction because you will not own the house).
What about wholesaling bank-owned REOs?
This post covered wholesaling houses as it pertains to buying from motivated sellers (private owners). So what about houses that are listed, like bank-owned REOs? We’ll talk about that in the near future. There are quite a few differences. Stay tuned.
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-DannyNext: Online Lead Generation Part 3: Pay Per Click for Real Estate Investors
Thanks for the post. You’ve got me excited about Wholesaling and Bird-dogging.
In a previous post, you outlined 15 questions that you ask sellers. How about questions that you ask a potential seller?
In my bird-dogging, I’ve created a list of addresses of vacant homes/homes I think are vacant and I would like to reach them on the phone. Any suggestions of how to get that conversation started?
I’m assuming you meant ‘buyer’ for your first question. The main things you want to find out are:
Can they pay cash?
How fast can they close?
How many deals are they looking to do each month?
How many deals have they done over the last year?
You want to find as many of the ‘serious’ buyers as you can. You need people that pay cash, close quickly, and can make quick decision. It wouldn’t hurt for them to be friendly and be something that you would enjoy selling houses to.
Regarding talking to owners of possibly vacant houses: You could just tell them that you are a real estate investor and are looking for houses to buy in the area. You happened to notice their house at 123 Main St and you would like to know if they would be interested in getting a cash offer for it.
That should get their attention and will show you quickly whether or not they would consider selling it.
You don’t get your full assignment fee upfront from the buyer? We don’t do it any other way….of course we don’t get to cash it til the deal closes.
No, I usually get $2,000 as non-refundable earnest money and the rest paid at closing. My typical assignment fee that I shoot for is $10,000 or more.
How is that assignment fee applied. Are you making the assignment fee public to the end buyer? Or do you include that in the total cost of the property? Example I find a deal at 100k. I want to make 10k. I list my deal at 110k? Or do I list it as 100k and ask for the fee separate?
Where is this written out? How is it separated by the title company?
I know this may be an elementary question but wanted to know.
Great question, Will!
Yes, you offer your deal at the marked up amount. You have your contract with the seller at 100k and you sign an ‘assignment of contract’ with the person/company/entity you are assigning the contract to. That assignment contract spells out that you make the difference between the price for the assignment and the price on the contract.
Title company will have a line on the HUD with the assignment amount being paid to you.
Well laid out article Danny, thanks!
So you mostly do assignments? Do your buyers have an issue with your assignment fee ever?
If we’re making $5k or more, we always tend to do a simultaneous close with our title company just to avoid any potential problems. Might be unnecessary added costs, but when you’ve had a deal blow up on you, you tend to be a bit more cautious in the future…
Yes, I always try to assign the contracts to avoid the extra closing costs. I’ve got a small number of serious buyers that usually buy most of my deals so they don’t complain (at least not too much) about how much I am making. 🙂
I will do a double close if I feel there will be an issue (usually when making $15k-$20k or more) or I am going with a buyer that I haven’t worked with before.
Avoiding potential problems is smart.
Do you use the same contract for your motivated seller as well as your end buyer?
It depends on whether I am double-closing or simply assigning my contract. If I am assigning my contract I use an assignment of contract that spells out the details of the assignment. If I am double-closing, I use the same contract with the end buyer as I did with the seller.
What do you tell your sellers about who is buying the property since you assign mostly? Do they know that you are not the end buyer and do they care? Just wondering how that piece is handled.
I only tell them that I will be looking for a buyer if the deal is tight and I’m not sure I can find one. Usually the deal is good and I don’t have to worry about it and do not tell them. They always close and the seller can care less who the end buyer ends up being (they don’t have to sign at closing at the same time so the seller is there signing alone anyway).
This article has been very helpful. I have a deal under contract for $20k and two houses in same block sold for $65k+… I’m thinking of closing on house and cleaning it up and re-listing around the $70k range.. This is a home run for me as long as it goes good. Do you think it’s better to do it this way as opposed to wholesaling I know I am adding more fees for closing but my profit numbers are substantial.
If you have the ability and those others that were sold were in similar condition and size and location, I don’t see why not to do it that way.
I’m a little confused by your example, in the case of assigning the contract. Are you saying that the wholesaler offers the seller $52K, and then assigns the contract to the end buyer at $60K? I’m a little confused how the $8K assignment fee is applied. Can you clarify this process a little further?
No problem, Kyle.
You are correct. Wholesaler tries to buy for $52k and signs a contract with seller. Then assigns that contract to an investor for $8k (so they sign an assignment contract with the new buyer agreeing to pay $60k with the difference being paid to the wholesaler as an assignment fee). The wholesaler’s assignment fee will be paid at closing by the title company out of the proceeds from the sale.
The end-buyer (investor) brings in enough money to buy the house at $60k. $8k of that is paid to you and $52k is paid to the seller. The title company handles paying out the funds.
Question… How do you show the property to the end buyer before closing? Doesn’t the end buyer want to go in the house and inspect it before signing a contract? How do you manage this?
If the house is vacant, you can see if the owner will allow you to place a lockbox with the key in it for the house. Just let them know that you like to bring contractors and/or business partners by to see the house so that you can plan everything.
If the owner lives in the house or you has tenants, you will need to take A LOT of pictures and/or video. Show these to potential buyers and if someone is seriously interested, schedule to bring them by as a partner or contractor to see the house.
if the seller lives in the house. Wont it be a problem if both the seller and end buyer meet before the deal is done? Can’t the Buyer potentially cut you out of the deal?
They could. You have a contract but that means nothing to some people. This is why it is important to let people know NOT to bother the tenant. You don’t have to tell them the tenant is the current owner. Other than that, if they ever want to receive any more deals from you, they will know not to try and go behind your back.
Another questions… Above you said that the seller and buyer do not close at the same time. So does the seller close first and then the buyer? What happens if the seller closes and then the buyer backs out? Does this ever happen, and how is that handled?
The timing of who signs doesn’t matter. All that matters is that both sign. It could happen that a buyer backs out and you should be prepared to deal with that. If you qualified your buyer well and demanded non-refundable earnest money from your buyer, they will be much, much less likely to not close.
Can you wholesale a house if the seller still owes money to the bank or must the house be owned free and clear ?
Absolutely. It doesn’t matter if they still owe money on the house as long as what you are offering will cover what they owe (as it must be paid off at closing).
Can a wholesaler change the offer due to the end buyer after an contract between the wholesaler and seller
I’m afraid I don’t understand your question. Please clarify. I’m assuming you mean that you told a buyer he could buy the house at price X. Then got a contract from the seller but had to pay more and now want to change the price you had told the buyer. Is that correct?
Quite the opposite…. the contract was at one price but the end buyer will buy for another price…how would you go about getting the seller to terminate the first contract and aggree to the one
Can you change the sale price with your seller if contract is already signed?
You could have them agree to the new price, change it on the original contract with them and have them initial the change.
What if the seller doesn’t agree to the new price and the contract is still valid. Where do you go from there?
If a property is with an listing agent and I go to thr agent as the buyer/investor and he gets the seller to agree to my offer will I be able to assign the contract to an end buyer?
It all depends on the contract. If the contract does not say anything about not being able to assign it, you should be able to assign it. It’s better to have it say ‘and/or assigns’ after the buyer name.
If not possible to assign, make sure you have a title company that will do a double-close and just double close.
Hey Danny, your article was very helpful to me. I’m a beginner in wholesale I have not done any deals just read a lot on it and very interested.
My question is before I jump in and start making offers , what should I have more knowledge in first? What exactly should i read or study more of before going out there?
Well, the best thing you can do is go through my course Freedom By Flipping. 😉
Other than that, I would focus on learning how to find the best cash buyers and finding what kinds of properties they want and finding those types of properties to sell to them. The easiest way to wholesale is to have a handful 2-5 buyers that buy ALL of your deals. Then it is just a matter of finding more and more deals.
Don’t buy into this crap I’ve seen lately that wholesaling is harder because you have to buy cheaper than others because you are selling to other investors. The truth is there are a lot of investors that don’t buy according to the typical calculations for deals. There are a lot that have different investment strategies and can pay more for the houses as long as they are what they are looking for.
What’s the best approach to take when trying to get a house from an agent? In other words the property is already listed but the seller is willing to negotiate but already tied into the contract
What you can do is tell the seller that they will need to either work something out with the agent if you are going to buy the house. Many agents will be at least take a reduced commission to help the seller get the house sold.
Great article…just a quick question. How do you determine the value of a property. Sometimes the motivated seller might be asking too much so how would I be able to know the after repair value so I could set my price to the seller?
Great question. It’s one that I’ve answered very thoroughly in this post: http://www.flippingjunkie.com/2013/determining-the-value-of-a-house-when-flipping
Hey Danny. Roshard, I would like to get more info. on REO’s. I am trying to get started. Your basic instructions were very explainable. I would appreciate it if I could learn more from you.
Awesome article! It helped me understand what I’m supposed to do a lot better.
Hi Danny, I listened to your podcast on wholesaling with Sharon Vornholt, and she mentions having an escape clause in the agreement signed witht he seller. W hich contract do you sign with the seller? Is it the 1 to 4 single family residential? And where in there do you add the escape clause?
Do you have a sample contract to look at?
Also, if your seller doesn’t close and I wanted to double close, what happens with my contract with the buyer, do I get sued? Do I owe him something? Or do I add an escape clause to that as well? Do I have to be a real estate agent to be able to put a lockbox on the door? If not, how do I get one?
What happens if I take the contract to title company and they find liens and such on the property, and now it’s not a good deal? Do I lose my earnest money? Or is that assumed a seller’s issue? Do they pay to settle those? Or do we have to renegotiate?
Thanks! I’m really enjoying the podcast and I’m a flippingjunkie fan 🙂
I am interested in wholesale house flippy thanks terry
Great! I love wholesaling houses flippy too!
Where would I get the money to buy my first wholesale property? I am new to this.
Hello, Sherwanda. I’ve got info on exactly that thing here: http://flippingjunkie.com/2013/how-to-flip-houses-with-almost-no-money
I tried to order the course but the site was not working
Hello, Betty. I’ve corrected the issue. Sorry for the inconvenience.
So are there any risks associated with assigning contracts. I read pretty thoroughly through the article and I didn’t seem to find any, but is there any legal or financial troubles that could arise from assigning a contract and being unable to find a qualified buyer for it? Or does your contract simply just expire at the end? And what happens to a contract if the owner sells the house out from under? Please email back.
You need to make sure the contract you are assigning doesn’t have a clause that prohibits you from assigning it. Other than that, I’m not an attorney and I do recommend you have an attorney review documents before using them.
The contract you are assigning should spell out what will happen if you don’t close (don’t find a buyer to assign and have them close).
The contract you are assigning should also specify what happens if the seller doesn’t perform.
Can I still order your course or when will you offer it again?
Yes. I still offer the course. You can find out more about and sign up here: http://freedombyflipping.com
This is a great article, thanks for posting. I pretty sure I understand the concept, my only question is how do I find cash buyers in my area?
Hey Kristy! You can find them by asking a local real estate agent to pull cash sold properties in the last 6 months and send letters to them to see if they’d be interested in off-market deals. You can also use listsource.com.
This is actually how I made over a million dollars before the real estate market tanked in in 2007-8. I wanted to get back into it. I had made my own assignmet contracts and took them to a lawyer to make sure they were legal. I even had the lawyer attend the first 3 closings with me. I preferred to go to the closings even though I did not ave to.
Great story. Crash of 2000 was crazy times for sure!
How do I find a network of potential buyers investor’s
Hey Damon! You will find this article helpful: http://leadpropeller.com/blog/5-tips-for-building-a-wholesale-buyers-list-fast/
This was a great article!! Loved it.