Working with Real Estate Wholesalers

If you list a property that is older and appears in any way to need repair, or if it appears that the sellers are in financial distress, brace yourself for an onslaught of offers from “investors”.

The offers will arrive in your email box and will be from buyers who have never set foot on the property, and in many instances have not even driven by.

In previous market cycles, most investor-buyers purchased property, invested their own time and money in repairs and renovations, and then re-sold the property for a profit.

In this market cycle, many of the initial offers are from buyers who call themselves “wholesalers” and their business model is to get the property tied up under contact, and then assign that contract to a second buyer.  The second buyer pays the wholesaler to purchase the contract.  And it is the second buyer that places all funds in escrow to complete the purchase, including the earnest money deposit.

Yes, it is legal for a buyer to sell his equitable interest in a purchase contract without the sellers approval, unless it is specifically prohibited in the language of the contract.  Without a specific prohibition, a contract could be bought and sold multiple times before closing.  This was confirmed with the CAR hotline attorneys.

I certainly believe that everyone has a right to try to make a profit in whatever business model they choose, but as agents, we need to be able to inform and advise our seller-clients.

Tips for working with wholesalers:

When you first receive an offer from a wholesaler, casually ask “Do you plan to assign this contract?”

When you counter an offer from a wholesaler include “contract may not be assigned within written approval from seller”.

Counter with a very tight time period for buyer to place his earnest money deposit in escrow.  Be aware that a wholesaler will be attempting to obtain the earnest money deposit from his second buyer, and will not be placing his own money in escrow.

Counter with a very tight time period for the inspection contingency.

Review the section in the purchase offer titled Seller’s right to cancel.  In the standard residential purchase offer RPA it is under paragraph 14 TIME PERIODS.  In the residential income property purchase offer RIPA it is under paragraph 18.  In the commericial purchase offer CPA it is under paragraph 17.  The preprinted form gives the buyer 2 days to perform after receiving the Notice to Perform.  I suggest changing that to 1 day at the checkbox fill-in space.

As soon as an offer/counter offer is accepted, take a moment to calculate the time periods.

Then I suggest sending a confirmation email to all parties saying something like:

“Thank you for your offer.  We look forward to a successful escrow.  Please note the following important dates:

Earnest money deposit must be placed in escrow no later than 5:00PM, Friday, July 25,  2014

All contingencies must be removed no later than 5:00PM, Friday, August 1, 2014.

Escrow must close on Friday, August 8, 2014.”

You should also include names and contact information for escrow and title, and all other parties to the transaction in the email.

 

Monitor time periods very closely.  Issue a Notice to Perform 2 days prior to the expiration of the applicable time as provided in the standard contract.  Issue a Notice of Cancellation immediately if the buyer does not perform by the expiration of the notice.

Be aware that a wholesaler may not have a second buyer in place when he makes an offer, and he may be using any contingency periods to find a second buyer.

Be sure that all contractual items on the seller side of the transaction, such as preliminary title report, required disclosures,  and natural hazard disclosure report are completed within the required time periods.

Be aware that after an “all cash” offer is accepted and ready to close, the wholesaler may inform you that the second buyer is obtaining a loan (or loans) after all, but that the loans are “hard money” and there is no loan contingency.

Be aware that this financing may be for an amount much higher than the purchase price.  The wholesaler will explain that this is because the cost of repairs was “built into” the financing.  This can be upsetting to a seller unless you have explained it in advance.

Debbie Monarrez of Arroyo Village Escrow told me that her attorneys have advised that, in the interest of full disclosure, the payment from the second buyer to the wholesaler should be made through escrow as well.  Be aware that this payment may, in fact, be for a larger amount than the broker commission.  This can be upsetting to a real estate agent.

Don’t let any of this discourage you from working with wholesale investors.  In fact, I believe there are things we can learn from their methods and systems.  Just be sure to pay careful attention to detail, and to stay on your toes.

 

Here are a couple articles with more information about wholesaling real estate

http://www.biggerpockets.com/renewsblog/2006/11/25/wholesaling-real-estate-basics/

http://investfourmore.com/2014/01/29/wholesaling-good-way-started-investing-real-estate/

(a search of the web will bring up many, many more):

 

Many of the articles I read about becoming a wholesaler stressed the importance of creating and maintaining a “robust list of buyers”.

This is exactly what real estate trainers have preached for decades:  Maintain a database of past and potential buyers and sellers and periodically  reach out to everyone on the list with a phone call, a postcard, or an email.

Technology and the internet have opened up new low cost avenues to search for potential buyers to build that list.

This 2009 article from BiggerPockets discusses several methods for a wholesaler to build a list of buyers:

http://www.biggerpockets.com/forums/93/topics/40258-how-to-build-a-buyers-list-fast-28-ways

Many of the ideas in the article could be adapted by a real estate agent looking to build a larger client base.

 

More to think about:

In searching the web to learn more about wholesaling, I discovered Reverse Wholesaling.  In this system, the guru instructs people to build a list of cash buyers first, then go find deals to specifically meet each buyer’s needs.

Same thing a licensed real estate agent does.  Or would do  …..