An attractive perk of wholesaling real estate is how you can flip houses with no money of your own, or even good credit. People hear about this and want to jump into the business right away! However, most of them don’t even know how to properly structure wholesaling contracts – so what clauses do you need to include in yours?
Let’s take a look at one kind of wholesaling agreement – an Assignment of Contract – and the types of language these documents should contain to protect wholesalers during deals.
How Assignment of Contract Works
There are three players in every wholesale transaction: The wholesaler, the seller, and the buyer. The steps are:
- The wholesaler finds a good property at a good price, and signs a Purchase Agreement with the Seller (the owner of the house).
- The Purchase Agreement gives the wholesaler entitlement to ‘assign’ or sell the property agreement to a buyer.
- To assign the agreement to the new buyer, the wholesaler finalizes an Assignment Agreement to legally transfer their purchase rights to the buyer.
- Handing over the baton to the buyer may cancel out the wholesaler’s legal liability and/or obligation towards the seller.
- Now, the buyer can purchase the property directly from the seller, as per the original terms of the Purchase Agreement.
In this process, your job as a wholesaler is to be the middleman. You find a good deal, secure the rights to it (using a Purchase Agreement contract with the seller), then assign the contract to a real estate investor or owner-occupier (using an Assignment Agreement with the buyer). Your goal is to at least make sure that each of these agreements includes the important clauses–which we’ll be going through below.
The Purchase Agreement
- CONVEYANCE – This term refers to the act of legally transferring property from one entity to another. So what you want is to ensure that the property’s fee simple will be delivered to the buyer (or a representative they assign) by a General Warranty Deed. It should be free from any liens, restrictions, encumbrances, easements, or encroachments (even those not specifically referenced in this contract).
- PRORATIONS – This clause is to ensure that property taxes and rents will be prorated based on the current year’s tax (without any exemptions, like discounts). All taxes should be current.
- DEFECTS – Have this clause to hold the seller accountable for any defects that might be found. Essentially, this clause should state that the seller assures the property to be without hazardous substances, any violation of zoning, environmental, building, health, or other governmental ordinances or codes; and that the seller affirms there are no known facts regarding this property that could adversely affect its value.
- NO JUDGEMENTS – The seller should confirm that there is nothing threatening the equity of the property. There should be no bankruptcy pending, or contemplation by any other title-holder.
- POSSESSION – The contract should state that possession of the property, its occupants, and all the keys, will be handed over to the buyer when the title is transferred. If the property is vacant, then possession and all the keys to the property will be given to the buyer once the contract is executed. All leases, advance rents, and security deposits should be transferred to the buyer as well.
- RIGHT TO ASSIGN – This clause, along with the next ones, are where you should dictate your intention to wholesale the property. Without this clause, you can’t legally wholesale the deal, so this is a pretty important one. It should say that you, the buyer intends to assign the contract to a new buyer and the seller’s approval is not needed. Then have the seller initial the provision. Assure them that they will still get the purchase amount as agreed.
- NO RECOURSE AGAINST BUYER – Upon default, the seller’s only solution is to retain what the buyer had put down as earnest money – they have no legal recourse to take any action beyond that against you, should you back out of the deal.
- CLOSING DATE – You want to give yourself as much time as possible to find someone to buy your contract. So negotiate at least 45 days or more.
- “AS IS” and INSPECTIONS – Make sure that this contract is contingent upon your inspection and approval of the property, before they transfer the title. The seller should provide you access and opportunity to inspect the property thoroughly (including all the power and utilities). If you accept the property, the contract should indicate that it’s in “As Is” condition. If you decline, then the buyer should notify the seller within 10 days from the day of the contract signing.
- PROHIBITIONS – You don’t want to limit yourself to just this property or to one buyer, so make sure there is a clause that allows you to still accept future assignments. You should not have any prohibitions to do so.
- ABILITY TO RENEGOTIATE – State that you can renegotiate the price. For example, specify a certain amount to be deducted for repairs. But if the property exceeds $20,000 in repairs, you should have the ability to back out, or renegotiate the asking price.
With that contract done, next, you need an Assignment Agreement to govern the second half of the wholesaling process.
The Assignment Agreement WHERE DOES WHOLESALER MAKE THEIR MONEY?
- This contract should say that you are “transferring” or assigning your right as the buyer to another party. The new party will now become the new buyer, and this now effectively closes the Purchase Agreement contract.
- In an assignment, the buyer can see the purchase price you have with the seller, so they could be put off when they see you’re making money off the deal. In this case, they may try to negotiate their own deal with the seller.
There’s a way you can try to protect against buyers cutting you out as the middleman and going directly to the seller instead:
a.) In the purchase agreement, there should be a clause that allows the wholesaler to immediately file a claim of interest against the property.
b.) Then, go right away to the local county and file that claim of interest.
c.) Now it’s recorded in the chain of title for the property, so if a buyer tries to go around you and go straight to the seller, they can’t get a clean title, because your claim of interest will be on record.
3. If the purchase contract gave you more leeway, this time, you want to be as strict as you can with the buyer, to prevent them from backing out at the last minute and compromising your deal with the seller.
Here’s one clause you might find useful for keeping your buyer on schedule. This clause penalizes them for any delay in closing. If they feel uncomfortable with agreeing to a $300-500 penalty, then they might not be very serious in the first place, so it’s not really that big of an ask. Here’s an example of how you can word this:
ASSIGNEE must close title on the property subject to the AGREEMENT by ____________, 20____. If seller of property subject to said AGREEMENT is ready, willing and able to close title on the above date but ASSIGNEE fails to close title on or before said date, ASSIGNEE will pay ASSIGNOR a per diem of $____________ until and including date of closing.
3. Aside from this, you’ll also want clauses which will make it as difficult as possible for the buyer to back out of fulfilling their Purchase Agreement, so ensure things like the property condition and price are clearly articulated and non-negotiable.
4. Finally, your assignment contract should also say “X is the amount I’m being paid as an assignment fee” – this is your profit, which the buyer pays to you when you sign the assignment contract. Only then do you sign over the purchase agreement to them. This way, it doesn’t matter if the buyer closes on the house or not, because you’re now out of the deal and have made your money already.
Once you’ve drafted your contracts up, have them reviewed by a local attorney who’s familiar with wholesaling contracts to see if it complies with your local laws. Not a lot of companies are used to dealing with wholesalers, so make sure you work with a lawyer who is.
Any other clauses we’ve missed? Share with us below!
Image Courtesy of Anna Shvets