A wholesaler is simply someone who goes out and secures real estate at below market cost and sells their interest to the general public at wholesale prices.
When wholesaling a property, you always need to end up make the decision on the mechanics of how you are going to wholesale it. There are two options to wholesale a deal: assignment of contract and double closing.
There are plusses and minuses to each of these options and specific scenarios where it makes sense to do one over the other and this article will give you all that you need to know.
What is an assignment?
With an assignment, the buyer takes your place in the contract. The original contract that you have with the seller that has your name with "and/or assigns" as the buyer.
You should always sign the initial agreement with your name and or/assigns regardless of whether you are going to wholesale the contract because even if you are not wholesaling the contract, you will want to have the ability to close in any entity of your choosing(in my cases we have a few different entities that we buy in.
You then would sign a completely separate agreement with your buyer(the investor who is going to actually close on the deal), which specifies how much your assignment fee. For example, if you put a property under contract for $150,000 and the end buyer is going to pay $160,000, you need to have a separate assignment contract that states that this buyer agrees to pay you $10,000 in order to “buy” your contract which allows them to pay $150,000 for the property.
Plusses of assigning
1. No closing costs
2. You know exactly how much you are making
Minuses of assigning
Investment buyer sees what you are paying. If the assignment fee is large enough, it is common that an investor will try to negotiate you down more on the price.
Unfortunately, some of this is human nature. If the investment buyer sees that you are making $30,000 on the assignment, they may feel that you shouldn’t make that much when all that you did was find the deal(when they have to put up the money and manage the project). Whether this is true or not is irrelevant...you just need to know that it happens all the time.
What is a double close
With a double closing, you sign a contract with the seller, and then you sign a separate contract between you and the buyer with the same closing date as the first contract. In this case you have two contracts: one contract with you as the buyer and one contract with you as the seller. You will pay closing costs when you buy it, and you will pay closing costs when you sell it. Many times, the seller will not know that you are reselling it and will not know how much or to who you are selling it to. The same is true for your buyer. A double closing has more anonymity and privacy, but you will pay for it with closing costs.
Pluses of double closing
1. Investment buyer does not see what you are paying
Minuses of double closing
1. It costs more. You need to pay closing costs such as attorney fees, transfer taxes,
2. You have to find an attorney that will do it - which is not a huge challenge but some won’t do this kind of transaction
When it generally makes sense to assign
1. When you know and fully trust the investor buying the deal. I buy a ton of assignment contracts myself every single year and the wholesalers who work with me know that I don’t care what they make on a deal and I won’t try to squeeze them if I know they are making a ton of money on a deal. The reality is that if you are unsure if you trust the investor enough, you don’t want to take any chances.
2. When you are making a small spread. There is no hard and fast rule about what this is, but, for example, if you are only making $3,000 on the assignment, you would literally lose money double closing so you would NEED to assign it to make any money
3. In my personal opinion, I will double close on any deal that I make $15,000 or more on UNLESS I know the end buyer very well and in that case I will assign regardless of the profit in the deal
When it generally makes sense to double close
1. When you are making a lot of money on the wholesale
2. If for some reason it is important to you to not have the end buyer find out what you are paying
At the end of the day, you don’t want to get bogged down into the details of the above UNTIL YOU HAVE A DEAL UNDER CONTRACT.
At the end of the day, if you have a great deal, figuring out the mechanics are the easy part. If the deal is bad, you could know the mechanics inside and out and it wouldn’t matter.
